Yahoo Finance Inflation Eases, but Only Slightly as More Interest Rate Hikes Loom
The annual rate of inflation continues to moderate, the U.S. Bureau of Labor Statistics announced Tuesday, but inflation remains significantly elevated and the pace of easing may not be fast enough to prevent the Federal Reserve from clamping down even tighter on the U.S. economy.
Consumer prices rose 0.5% in January on a monthly basis, while the 12-month inflation rate was 6.4%, the Bureau said.
Housing costs, which rose by 0.7% on the month and 7.9% on the year, played a significant role in the results, providing about half of the inflationary boost during the month. Energy (up 2% monthly and 8.7% annually) and food prices (up 0.5% monthly and 10.1% annually) also rose sharply.
The price of eggs saw a particularly large jump, rising 8.5% in January and 70% over the last year to $4.82 a dozen on average – more expensive than a pound of ground beef or a gallon of gasoline.
Core inflation – a measure closely watched by the Fed that leaves out volatile food and energy prices – rose 0.4% monthly and 5.6% from a year ago, with the annual rate continuing a downward trend that began in September. However, both numbers were higher than the expectations of 0.3% and 5.5% respectively.
What the experts are saying: The numbers provide ammunition for both inflation hawks and inflation doves. The latter will note that the 12-month rate of 6.4% was down from 6.5% the month before, continuing a string of reductions in the inflation rate since the peak of 9.1% was recorded in June.
“Inflation in America is continuing to come down, which is good news for families and businesses across the country,” President Joe Biden said in a statement. “Today’s data confirm that annual inflation has fallen for seven straight months.”
Analysts at Bank of America said the report did little to change their outlook. “In our view, there is not a lot of new information in this report,” they wrote in a research note. “Today's report did not drastically alter the risks around the policy outlook.”
Inflation hawks, meanwhile, are focused on the fact that the annual inflation rate remains well above the Fed’s target of 2%, while the monthly rate of 0.5% in January increased sharply from the 0.1% monthly rate recorded in December, suggesting that the path ahead for could be uneven at best, with no guarantees that inflation will be brought under control anytime soon.
“Inflation remained searingly hot in January, which is bad news for consumers,” wrote Diane Swonk, chief economist at KPMG. “The Fed has not yet beaten inflation. Brace for at least two more rate hikes.”
Economist Edoardo Campanella of UniCredit Bank said that the January inflation report “dissipates hopes for a rapid disinflationary process. … The Fed will likely see today’s number as corroboration of its assessment that the economy is at the very early stages of what’s likely to be a bumpy disinflation process. Bringing inflation sustainably to the 2% target will require tight monetary policy for some time.”
In a speech Tuesday, Dallas Fed President Lorie Logan said the central bank may need to raise rates higher than expected. “We must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions,” she said.
The growing likelihood that the Fed will act more aggressively to contain inflation means that the odds of the central bank causing a recession are probably rising as well. “This idea that we can get continued disinflation without a material slowdown in the economy has been the narrative the market has run with,” Priya Misra of TD Securities told The New York Times. “But that has come under pressure, and today reinforced it.”
The bottom line: The latest inflation report supports the view that the Fed will raise interest rates again, probably by 25 basis points at its next meeting in March, and it could do so again at its following meeting in May. The new concern raised by Tuesday’s report is that the Fed may take interest rates even higher and stay there for even longer than previously expected, raising the risk of recession along the way.
