Inflation rose more than expected in January as persistently high housing prices weighed on consumers, the Labor Department said Tuesday.
The consumer price index, a broad measure of the prices consumers across the economy face for goods and services, rose 0.3% this month, the Bureau of Labor Statistics reported. On a twelve-month basis this amounted to 3.1%, compared to 3.4% in December.
Economists consulted by Dow Jones expected a monthly increase of 0.2% and an annual gain of 2.9%.
Excluding volatile food and energy prices, the so-called core CPI accelerated 0.4% in January and rose 3.9% from a year ago, unchanged from December. The prediction was 0.3% and 3.7% respectively.
Shelter prices, which make up about a third of the CPI weighting, accounted for much of the increase. The index for that category rose 0.6% this month and contributed more than two-thirds of the total increase, the BLS said. On a twelve-month basis, childcare increased by 6%.
Food prices also rose higher, up 0.4% on the month. Energy helped offset some of the increase, with a decline of 0.9%, largely due to a 3.3% drop in gasoline prices.
Stock market futures fell sharply after the release. Futures tied to the Dow Jones Industrial Average fell more than 250 points and Treasury yields soared.
Even with the price increase, inflation-adjusted profits rose 0.3% this month. However, corrected for the decline in the average working week, the real weekly wage fell by 0.3%. The real average hourly wage increased by 1.4% compared to a year ago.
“Inflation is generally moving in the right direction,” said Lisa Sturtevant, chief economist at Bright MLS. “But it's important to remember that lower inflation doesn't mean the prices of most things will fall – it simply means prices will rise more slowly. Consumers are still feeling the pressure of higher prices for the things they buy most often. .”
The release comes as Federal Reserve officials try to find the right balance for monetary policy in 2024. While financial markets are looking for aggressive rate cuts, policymakers have been more cautious in their public statements, focusing on the need to let the data be their guide rather than preset expectations.
Fed officials expect inflation to fall back to their annual target of 2%, largely because they think housing prices will slow as the year progresses. The increase in January could be problematic for a central bank looking to loosen the brakes on monetary policy at its tightest level in more than two decades.
“The long-awaited CPI report is a disappointment to those who expected inflation to be lower, meaning the Fed could start easing rates sooner rather than later,” said Quincy Krosby, chief strategist at LPL Financial. “Across the board, the numbers were higher than expected, meaning the Fed will need more data before it can initiate a rate-cutting cycle.”
Overall, inflation data were encouraging, even though annual rates remained well above the Fed's 2% target. Moreover, core inflation, which officials say is a better guide to long-term trends, has proven even more persistent as housing costs have remained higher than expected.
In recent days, policymakers including Chairman Jerome Powell have said the broader strength of the U.S. economy gives the Fed more time to crunch data, as long as it doesn't have to worry about high interest rates crushing growth.
Market prices ahead of the CPI release indicated a bias toward the first rate cut in May, with a likely total of five quarter percentage points lower before the end of 2024, according to CME Group data. However, several Fed officials have said they think two or three cuts are more likely.
Aside from the increase in shelter costs, the rest of the inflation picture was a mixed bag.
Used vehicle prices fell 3.4%, clothing costs fell 0.7% and medical raw materials fell 0.6%. Electricity costs increased by 1.2% and air fares by 1.4%. In the supermarket, ham prices fell by 3.1% and eggs by 3.4%.
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