Inflation rose more than expected in January, the Labor Department reported Tuesday, as a persistent rise in home prices weighed on consumers.
The Consumer Price Index, a broad measure of the prices shoppers face for goods and services throughout the economy, rose 0.3% during the month, the Bureau of Labor Statistics reported. On a 12-month basis, this came to 3.1%, down from 3.4% in December.
Economists surveyed by Dow Jones were expecting a monthly increase of 0.2% and annual gains 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. Expectations were 0.3% and 3.7%, respectively.
Shelter prices, which make up about a third of the CPI's weight, accounted for the bulk of the rise. The BLS said the index for this category rose 0.6% month-on-month, contributing more than two-thirds of the main increase. On a 12-month basis, shelter is up 6%.
Food prices also rose 0.4% month-on-month. Energy helped offset some of the increase, down 0.9% due largely 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 rose.
Even with prices rising, inflation-adjusted hourly wages rose 0.3% during the month. However, after adjusting for declines in the average workweek, real weekly earnings fell by 0.3%. Average real hourly earnings increased by 1.4% compared to last year.
“Inflation is generally moving in the right direction,” said Lisa Sturtevant, chief economist at Bright MLS. “But it is important to remember that lower inflation does not mean that the prices of most things are falling – it simply means that prices are rising more slowly. Consumers are still feeling the pinch of rising prices for the things they buy.” In most cases.”
The release comes as Federal Reserve officials look to determine the appropriate balance for monetary policy in 2024. Although financial markets have been eyeing significant interest rate cuts, policymakers have been more cautious in their public statements, focusing on… The need to allow data to circulate. Their guide rather than pre-set expectations.
Fed officials expect inflation to fall to their annual target of 2%, largely because they believe home prices will slow during the year. The increase in January could be a problem for the central bank looking to take its foot off the monetary policy brake at its tightest levels in more than two decades.
“The long-awaited CPI report is a disappointment to those who expected lower inflation allowing the Fed to start easing interest rates sooner rather than later,” said Quincy Crosby, chief global strategist at LPL Financial. “Across the board, the numbers were hotter than expected which underscores that the Fed will need more data before embarking on an interest rate cutting cycle.”
Overall, inflation data was encouraging, even if annual interest rates remained well above the Fed's 2% target. Moreover, core inflation, which officials believe is a better guide to long-term trends, has been more stubborn as housing costs remain 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 process the data because it doesn't have to worry about higher interest rates crushing growth.
Market prices ahead of the CPI release indicated a bias towards the first interest rate cut in May, with an overall decline of five percentage points likely before the end of 2024, according to CME Group data. However, several Fed officials said they believe two or three cuts are more likely.
Other than the jump in shelter costs, the rest of the inflation picture was mixed.
Used car prices fell 3.4%, clothing costs fell 0.7%, and medical goods fell 0.6%. Electricity costs rose by 1.2% and airline ticket prices increased by 1.4%. At the grocery store, pork prices fell 3.1% and egg prices jumped 3.4%.
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