The Consumer Price Index increased 0.5% month-on-month (m/m) in January, meeting expectations. The 12-month change edged lower to 6.4% (down from 6.5% in December).
Energy prices increased by 2.0% m/m, as rising gasoline prices (+2.4% m/m) and energy services (+2.1% m/m) each notched similar gains on the month. Food prices rose 0.5% m/m and were up 10.1% y/y.
Core inflation (excludes food & energy) rose 0.4% m/m – matching December’s gain. Compared to last January, prices were up 5.6% – a tick lower than the 5.7% recorded in December.
Price growth across services (+0.5% m/m) saw a modest deceleration from December. Gains were concentrated in the shelter component (+0.7% m/m) with both rents and owner’s equivalent rent each notching similar gains. Lodging away from home (+1.2% m/m) was also higher in January.
- Stripping out shelter, “super” core service inflation rose 0.3% m/m – a modest deceleration from the 0.4% m/m gain in December – and is up 6.4% y/y.
Core goods prices (0.1% m/m%) recorded a modest gain – ending what had been three prior months of declines. Price growth was seen across most categories including household furnishings (+0.5% m/m), apparel (+0.8% m/m), recreation commodities (+0.1% m/m) and other goods (+0.8% m/m). Transportation goods (-0.7% m/m) were lower on the month, as used vehicle prices (-1.9% m/m) recorded another sizeable decline, while new vehicle prices (+0.2% m/m) were higher.
Key Implications
Despite core inflation matching December’s month-on-month gain, favorable base effects meant that inflation continued to lose speed on a year-over-year basis. That said, the three-month annualized change rose to 4.6% (previously 4.3%) – ending what had been two consecutive months of declines.
A big reason for the sustained upward pressure on price growth last month was the result of goods prices no longer being a source a deflation as it had been in each of the prior three months. Indeed, used vehicle prices recorded another month of solid declines, however, that was more than offset by stronger price growth across most other consumer goods categories. With more recent wholesale car price data – as measured by the Manheim UVPI – showing used vehicle prices having turned higher, further declines from this component are unlikely. Unless we see price growth across other goods turn lower, goods inflation will again make positive contributions to core inflation.
Today’s inflation numbers reinforce Chair Powell’s recent messaging that we are only in the very earlier stages of the disinflationary process. The adjustment is unlikely to occur in a linear fashion, and it certainly can’t make meaningful progress in an environment where the economy continues to add +500k jobs per-month. We expect that the FOMC will need to raise the Fed funds rate at each of its next two meetings by 25 basis points in order to make the policy stance sufficiently restrictive to cool the economy and return inflation to 2%.
