Shoppers at the Homeland grocery store in the underserved northeast side of Oklahoma City, Sept. 1, 2021. (AP Photo/Sue Ogrocki)
Inflation rose by a higher-than-expected 0.5 percent in January after a 0.1 percent increase in December, with rising shelter costs accounting for about half the monthly increase, the Bureau of Labor Statistics said Tuesday in the January CPI report.
Year-over-year, the consumer price index report was up 6.4 percent from the same period in 2022 — also higher than expected, driven by increases in the price of food, shelter, and energy after inflation had shown signs of receding in November and December.
The key or “super core” service indexes that exclude food, shelter and energy, rose 0.2 percent in January and 4 percent higher than a year ago.
Top economists, strategists, investment officers and other experts weighed in on what the inflation data means for macroeconomics, markets and monetary policy looking ahead. While some were more dovish and others, more hawkish, all appeared to agree that inflation is not going away quietly. Here are some perspectives.
Together, Tuesday’s CPI report and the strength of recent jobs reports will likely lead the Fed to raise interest rates by 25 basis points for the second time this year, USA Today reported. The CPI report likely won’t give the Fed enough confidence that inflation will continue to ease on its own for it to stop raising interest rates, said Bill Adams, chief economist at Comerica Bank.
“Recent data have sent conflicting signals,” Adams said. For example, the latest jobs report presents the economy in a positive light as opposed to recent layoffs announcements and consumer spending and industrial production data. “The Fed will look at the balance of the signal from these data in deciding how much more to raise interest rates this year.”
“Inflation is like a race between watching grass grow and paint dry, and is a process in time. But the deceleration is intact, even if gradual so far,” Rosenberg said, according to business forecasts and personal finance publisher Kiplinger. “In the second half of the year when new rental supply coming on stream dwarfs the natural demand by more than a factor of two, watch the service sector component of the CPI slow much more sharply,” Rosenberg added. “At the same time, an economy with no vitality outside of the last vestiges of ‘excess savings‘ is going to continue to weigh on the more cyclical components of the index.”
Following the release of the January CPI report, Logan warned that the central bank may need to push rates higher than expected, especially if super-core remains in the 4-to-5-percent 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.
The surprisingly strong labor market is another risk, Logan said. “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 of weeks ago, it is hard to have confidence in any outlook.”
“There is some hope that this CPI number, still up over 6 percent year-over-year, might be a bit overstated,” Williams said, according to a Kiplinger report. “But, we expect the Fed to continue to jawbone negatively and we think a timing difference will continue between the Fed governors and the stock market about how quickly we see inflation come down toward 2 percent. There is nothing here to derail the rally significantly because both bulls and bears can believe whatever they want to about the second half. However, data points will have to start breaking more for the bulls by the second half for this rally to last all year.”
“So much for immaculate disinflation,” wrote Steven Blitz, managing director of global macro and chief U.S. economist at TS Lombard. “January CPI data make clear that inflation is not dropping to 2 percent without a recession raising unemployment above 4.5 percent and this underscores my long-held view that the Fed erred by downshifting hikes.”
Immaculate inflation is one of several scenarios for how inflation could play out, according to Federal Reserve Bank of St. Louis economist William R. Emmons. In the immaculate disinflation scenario — the so-called “easy way” — inflation and the steps needed to reduce it cause minimal damage to the overall economy. There may still be an economic recession but it will be a mild one, providing for a “soft landing.”
“Inflation is easing but the path to lower inflation will not likely be smooth,” Roach said in a GlobeSt.com report. “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. … But according to the University of Michigan’s benchmark survey, long-term inflation expectations are well-anchored at 2.9 percent, unchanged for the third consecutive month and this supports the view that the Fed will hike by 0.25 percent at the next meeting and not revert to larger rate hikes.”
