U.S. inflation rose to 3 percent in January, strengthening the case for the Federal Reserve to extend a pause on interest rate cuts. The Consumer Price Index jumped more than expected, data from the Bureau of Labor Statistics showed on Wednesday, rising 0.5 percent from December in what was the fastest monthly increase since August 2023. Last month, the annual pace was 2.9 percent.
“Core” CPI, which more closely reflects underlying inflation by removing volatile food and energy prices, also showed little improvement. It rose 0.4 percent from December or 3.3 percent on a year-over-year basis, both higher than economists expected. The monthly increase in core prices was the highest since April 2023. The January data underscored the uneven nature of the central bank’s battle against high prices. Inflation has subsided drastically since cresting just above 9 percent in 2022, but progress in recent months has been much more sporadic.
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, described the latest inflation report as “sobering.” Mr. Goolsbee, who will cast an official vote on policy decisions this year, said he did not want to read too much from one inflation report, especially since it followed two months of more “encouraging” developments and noted some typical seasonal quirks were observed earlier this year. But he made clear it was unwelcome. “There’s no question, if we got multiple months like this, then the job is clearly not done,” he said.
Pricing trends showed mixed signals for consumers, with many categories rising even as others fell. Grocery prices climbed 0.5 percent compared with the previous month, or 1.9 percent on a yearly basis. This increase was driven largely by a national egg shortage linked to avian influenza, pushing costs up 15.2 percent since December. Over the past year, egg prices have surged by 53 percent, marking the largest monthly increase since June 2015 and accounting for roughly two-thirds of grocery price increases.
Gasoline prices also rose another 1.8 percent, though they are down 0.2 percent compared to the same time last year. The increases extended to airline fares, hotel rates, and even used cars and trucks, with prices up about 2 percent from December. Despite these jumps, economists suggested many of these prices might not continue on such trends.
Monthly changes showed the following increases for January: Fuel oil +6.2%, Used cars and trucks +2.2%, Motor vehicle insurance +2.0%, and Meats, poultry, fish, and eggs +1.9%. On the flip side, some necessary consumer goods' prices pulled back, showcasing mixed trends across the board.
The situation is also evident concerning housing costs, which have not significantly declined. January recorded shelter price increases of 0.4 percent month-over-month and 4.4 percent year-over-year. “We’re seeing inflation getting stuck around 3 percent, and the last percentage point becoming very difficult to achieve,” said Jonathan Wright, a former Fed economist now at Johns Hopkins University. He noted the potential for rate increases is now at least as likely as cuts.
The latest price pressures come amid uncertainties about the wider economic outlook just weeks after President Trump’s reelection. Many proposed administrative changes, such as tariffs and deregulations, could impact price trends but their results depend on execution. “The risks are to higher inflation and lower growth,” said Alan Detmeister, now with UBS, highlighting how politics may exacerbate economic uncertainties.
Republicans quickly traced blame back to the Biden administration for the recent rise, with Representative Jason Smith criticizing previous policies and pointing to continued price challenges. Donald Trump himself chimed in, insisting on social media, “BIDEN INFLATION UP!” The rift between political expectations and economic realities appears stark, particularly as the Fed shows little urgency to cut interest rates again following recent hikes.
The backdrop of economic reactions following the latest CPI data saw shifts among various markets. U.S. stock index futures dipped by nearly 1%, reflecting bearish sentiments before Wall Street opened. Interest rates contracted, with the yields on 10-year U.S. Treasury bonds rising to 4.641% and the two-year yield climbing to 4.359%.
Market analysts observing the dynamics noted this CPI spike may prompt the Fed to maintain its cautious approach on easing. Dan Siluk of Janus Henderson echoed these sentiments, saying, “The bottom line is clear. The Fed should not be cutting,” citing broader economic conditions not warranting immediate rate cuts.
Indeed, the economic factors at play alongside rising CPI data have led many experts to fear stagnation may lie ahead. The markets showed broader tensions following the CPI report: stocks down, bonds up, and the dollar strengthening. “Today’s number came in much hotter than expected...adding to inflation worries,” said Peter Cardillo of Spartan Capital Securities.
Despite the pressure, Fed Chair Jerome Powell noted substantial progress has been made to tackle inflation but emphasized, “We’re not quite there yet, so we want to keep policy restrictive.”
While the Fed appears to hold the line on rate cuts, it remains to be seen how both the economic conditions and political pressures will influence monetary policy going forward. With economists predicting persistent pressures, consumers might brace themselves for elevated costs as 2023 carries on.