The data show that while inflation is fading, it is likely to do so slowly and unevenly. The government also incorporated annual revisions of its methods into January’s inflation report, which caused monthly increases in the final three months of last year to be higher than originally reported. Combined with January’s price figures, the slowdown in inflation since the fall is now more gradual than it seemed just a few weeks ago.
Excluding volatile food and energy costs, so-called “core” prices increased 0.4 per cent last month, up from 0.3 per cent in December. Core prices rose 5.6 per cent from a year ago, down just a tick from December’s 5.7 per cent.
In the past three months, core prices have risen at a 4.6 per cent annual rate, which is below the year-over-year number and suggests that more declines are coming. But that figure is up from 4.3 per cent in December.
“These things never happen in a straight line,” said Tiffany Wilding, an economist at PIMCO, an asset management firm. “But I think the overall balance of evidence suggests that we are starting to see inflation move in the right direction.”
Fed Chair Jerome Powell said last week that the “process of getting inflation down has begun.”
But “this process is likely to take quite a bit of time,” he added. “It’s not going to be, we don’t think, smooth, it’s probably going to be bumpy.”
The Fed has aggressively raised its benchmark interest rate in the past year to its highest level in 15 years in its drive to get rampaging inflation under control. The Fed’s goal is to slow borrowing and spending, cool the pace of hiring and relieve the pressure many businesses feel to raise wages to find or keep workers. Businesses typically pass their higher labor costs on to their customers in the form of higher prices, thereby helping fuel inflation.
So far, most of the slowdown in inflation reflects freer-flowing supply chains and earlier declines in gas prices. Those factors have sharply reduced inflation in goods, including cars, furniture and toys. Overall core goods prices ticked up just 0.1 per cent in January, after declining for three months.
Furniture prices were unchanged in January for a second straight month and are up just 2.2 per cent from a year ago. Average new car prices rose just 0.2 per cent last month, though they’re still 5.8 per cent more than last January.
Used car prices, which had soared in 2021 and early last year amid widespread supply disruptions, dropped 1.9 per cent last month, the seventh straight decline. They’re now 11.9 per cent lower than they were a year ago.
Gas prices rose 2.4 per cent in January, the government said, with prices averaging US$3.50 a gallon nationwide by the end of last month. Prices at the pump have since dropped back to US$3.41 as of Tuesday, according to AAA.
Food prices jumped 0.5 per cent from December to January, defying hopes for a smaller increase. Cereals and bread products became costlier. And egg prices jumped 8.5 per cent just in January and have skyrocketed 70 per cent in the past year. Those prices have been driven up by more expensive feed and an avian flu epidemic that has devastated chicken flocks.
More expensive food, along with other rising costs, has caused Pat DeCandia, a 65-year-old retired teacher from Ridgefield, New Jersey, to change her buying habits. She will no longer buy specialty items like smoked salmon from Costco.
“I can do without that,” she said.
DeCandia is buying more store-label items, which are typically cheaper. For mayonnaise, she is skipping Hellmann’s and now buys a store-label brand at ShopRite called Bowl & Basket. And whenever anything is on sale, she stocks up.
Though goods prices across the economy have come down, services costs, including housing, remain chronically high. Rental costs jumped again in January, up 0.7 per cent, and are 8.6 epr cent more than a year ago.
Housing costs account for fully 2.75 percentage points of the 6.4 per cent yearly inflation increase, according to calculations by Eric Winograd, an economist at AllianceBernstein. But Powell and other economists expect housing costs to start declining by the middle of this year. Market rates for new rental leases have been easing since fall, and the Fed expects those lower costs to gradually feed into the government’s data.
Excluding housing, however, the cost of other services are still accelerating. Auto insurance prices jumped 1.4% in January and are nearly 15% higher than a year ago. Recreation, which includes movie tickets and veterinary costs, rose 0.7% last month and is up 5.8% from a year earlier.
The Fed is particularly focused on the cost of services excluding housing. That is because the prices of labor-intensive services tend to be especially difficult to curb. With the strong job market compelling employers to raise pay to attract and keep workers, employers are often passing on those higher labor costs to their customers by charging more.
Kathy Bostjancic, chief economist at Nationwide, calculates that in January, services prices excluding housing were 6.1% higher than they were a year earlier, barely below December’s figure of 6.2 per cent. The slow decline reflects the fact that the Fed’s rate hikes — eight since March of last year — have had no discernible effect on America’s job market, which remains exceptionally strong.
The unemployment rate h as dropped to 3.4 per cent, the lowest level in 53 years, and job openings remain high. The strength of the job market has, in turn, helped support consumer spending, which underpins the bulk of the U.S. economy. With unemployment so low, average wages are rising at a brisk pace of about 5 per cent from a year ago.
Many economists expect inflation to fall to roughly 4 per cent later this year. But it could plateau at that point so long as hiring and wage gains remain vigorous. The Fed might then feel compelled to keep borrowing rates high well into 2024 or even raise them further this year.
A key question for the economy this year is whether unemployment would have to rise significantly to achieve a slowdown in wage growth. Powell and other Fed officials have said that curbing high inflation would require some “pain” for workers.
