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January Inflation Report: Prices Are More Stubborn Than Expected


Inflation cooled less than expected in January and showed worrying staying power after stripping out volatile food and fuel costs — a reminder that bringing price increases under control remains a bumpy process.

The overall Consumer Price Index was up 3.1 percent from a year earlier, which was down from 3.4 percent in December but more than the 2.9 percent that economists had forecast. That figure is down from the latest peak of 9.1 percent in the summer of 2022.

But after stripping out food and fuel, which bounce around in price from month to month, “core” prices held roughly steady on an annual basis, climbing 3.9 percent from a year earlier. The measure climbed by the most in eight months on a monthly basis.

Federal Reserve officials had welcomed a recent moderation in inflation, and will likely take the fresh report as an affirmation that they need to remain cautious. Policymakers have been careful to avoid declaring victory over inflation, insisting that they need more evidence that it is coming down sustainably.

Investors sharply pared back chances for an imminent rate cut in the wake of the data, betting that the Fed will not lower interest rates at their next meeting in March and sharply dialing back the odds that it will do so even at their following meeting in May — a sign that they think the fresh inflation figures will keep officials wary.

Fed policymakers have raised interest rates to about 5.3 percent, up from near zero in early 2022, in a bid to cool consumer and business demand and force companies to stop raising prices so quickly. Because inflation has been coming down notably in recent months, they have paused their rate increases and are contemplating when and how much to lower borrowing costs.

But they want to avoid cutting rates before inflation is fully snuffed out, because they worry that doing so could allow rapid price increases to become a more permanent feature of the American economy.

“They were right to be patient, because this is the kind of number that is going to cast doubt on whether there really is a lot of deceleration in store for inflation,” said Omair Sharif, founder of Inflation Insights. “This is definitely a spooky number.”

Slower inflation over recent months has also been a welcome development for President Biden. Surging living expenses have eaten away at household budgets, weighing on voter confidence even though the job market is strong and wages are climbing at a brisk pace. As price increases have begun to ease, people are starting to report sunnier economic outlooks.

The question for both the administration and the Fed is whether the cool-down in inflation over the past six months can last — and the fresh inflation report may keep officials wary.

“Is it sending us a true signal that we are, in fact, on a path — a sustainable path — down to 2 percent inflation?” Jerome H. Powell, the Fed chair, said during his Jan. 31 news conference. “That’s the question.”

The Fed aims for 2 percent inflation on average using a separate but related measure, the Personal Consumption Expenditures index. The January reading of that gauge is set for release on Feb. 29.

Inflation has been falling for several reasons, but a big driver of the recent improvement has been healing in global supply chains. Prices for goods started jumping in 2021 as shipping route and factory disruptions tied to the pandemic left semiconductors, automobiles and furniture in short supply.

Those problems have slowly cleared, and goods prices have recently cooled — and, for some products, dropped. Used car prices fell sharply in January, for instance.

More recently, price increases for key services have also begun to moderate. Economists are now closely watching what happens with one in particular: housing. Rent increases have begun to slow down in official inflation data, but many analysts have been expecting that trend to deepen as cheaper new leases slowly feed into the official data.

But on that point, January’s report offered reasons for caution. A measure that estimates how much it would cost to rent a house that someone owns — called owner’s equivalent rent — picked up on a monthly basis.

The acceleration “looks at odds with other surveys of rent data that we monitor,” said Blerina Uruci, chief U.S. economist at T. Rowe Price.

Still, the figures mean that the Fed will need to remain cautious — and that officials are unlikely to cut interest rates until May or June.

“They really need to make sure that inflationary pressures will not re-accelerate before they can cut interest rates,” Ms. Uruci.



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