According to a study released on Tuesday (February 14, 2023) by the Labor Department, inflation increased to begin 2023 as consumers felt the effects of rising fuel, gas, and housing prices.
A comprehensive selection of everyday products and services are included in the consumer price index, which increased 0.5% in January for a 6.4% annual gain. Economists surveyed by Dow Jones had been looking for respective increases of 0.4% and 6.2%.
Excluding volatile food and energy, the core CPI increased 0.4% monthly and 5.6% from a year ago, against respective estimates of 0.3% and 5.5%.
Markets were volatile following the release, with the Dow Jones Industrial Average down about 200 points at the open and heading lower.
The Bureau of Labor Statistics stated in the study that rising housing expenses were responsible for roughly half of the monthly increase. The component, which makes up more than one-third of the index, increased 0.7% month over month and 7.9% year over year. The CPI had risen 0.1% in December.
Energy also was a significant contributor, up 2% and 8.7%, respectively, while food costs rose 0.5% and 10.1%, respectively.
Rising prices meant a loss in real pay for workers. A separate BLS data that accounts for inflation shows that average hourly earnings decreased 0.2% for the month and were down 1.8% from a year ago.
Despite a recent slowdown in price growth, January’s numbers indicate that inflation is still a force in a U.S. economy that is in danger of entering a recession this year.
That has come despite Federal Reserve efforts to quell the problem. Since March 2022, the central bank has increased its benchmark interest rate eight times, while last summer saw the greatest inflation in 41 years.
“Inflation is easing but the path to lower inflation will not likely be smooth,” said Jeffrey Roach, chief economist at LPL Financial. “The Fed will not make decisions based on just one report but clearly the risks are rising that inflation will not cool fast enough for the Fed’s liking.”
The strength of core inflation suggests that the Fed has a lot more work to do to bring inflation back to 2%. If retail sales also show strength tomorrow, the Fed may have to increase their funds rate target to 5.5% in order to tame inflation.
Maria Vassalou
In recent days, Fed Chairman Jerome Powell has talked about “disinflationary” forces at play, but January’s numbers show the central bank probably still has work to do.
There was some good news in the report. Medical care services fell 0.7%, airline fares were down 2.1% and used vehicle prices dropped 1.9%, according to seasonally adjusted prices. Egg prices, however, rose 8.5% and are up a stunning 70.1% over the past year.
Evaluating ‘super-core’ inflation
Even while it is commonly anticipated that these figures will slow down later in the year, the increase in property prices is keeping a floor under inflation.
That’s why some Fed officials, including Powell, say they are looking more closely at core services inflation minus shelter prices “super-core” in determining the course of policy. That number rose 0.2% in January and was up 4% from a year ago.
Markets anticipate that the Fed will increase its overnight lending rate from its current target range of 4.5%-4.75percentage over its two next sessions in March and May. That would allow decision-makers some time to wait and see how the tightening of monetary policy will affect the overall economy. Should inflation not fall back, that could mean more rate hikes.
Dallas Fed President Lorie Logan on Tuesday cautioned that the central bank may need to push rates higher than expected, particularly if super-core remains anchored in the 4%-5% range.
“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 during a speech in Prairie View, Texas.
Logan, a voting member this year on the rate-setting Federal Open Market Committee, added that she is concerned about higher commodity inflation as China reopens from its Covid lockdowns, and sees the surprisingly strong labor market as another risk.
“When inflation repeatedly comes in higher than the forecasts, as it did last year, or when the jobs report comes in with hundreds of thousands more jobs than anyone expected, as happened a couple weeks ago, it is hard to have confidence in any outlook,” she said.
Recession possibility
The next big data point will be retail sales, which hits Wednesday morning at 8:30 a.m. ET. Economists surveyed by Dow Jones expect the figure, which is not adjusted for inflation, will show that sales rose 1.9% in January from the prior month.
“The strength of core inflation suggests that the Fed has a lot more work to do to bring inflation back to 2%,” said Maria Vassalou, co-chief investment officer of multi-asset solutions at Goldman Sachs Asset Management. “If retail sales also show strength tomorrow, the Fed may have to increase their funds rate target to 5.5% in order to tame inflation.”
There’s widespread belief that the economy could tip into at least a shallow recession later this year or early in 2023. However, the latest tracking data from the Atlanta Fed puts expected GDP growth at 2.2% for the first quarter, following a relatively strong finish for 2022.
The likelihood of a recession over the next 12 months is set at 57.1% by a New York Fed barometer, the highest level since the early 1980s. The barometer estimates the probability of a recession using the differential between 3-month and 10-year Treasury yields.
January’s CPI report will take some time to analyze, as the BLS changed its methodology in how it reports the index. Some components, such as shelter, were given higher weightings, while others, such as food and energy now have slightly less influence.
The Fed also altered how it calculates a crucial factor known as owners’ equivalent rent, which is a gauge of how much property owners might earn if they rented instead of selling. The price of stand-alone rentals is currently receiving a little bit more attention from the BLS than apartment rents.
