Consumer Price Index inflation decreased to 6.4 percent on an annual basis.

Inflation continued to slow on an annual basis in January, but it picked up on a monthly basis, which could lead the Fed to raise interest rates higher than previously expected.


The Consumer Price Index rose 6.4 percent in January from a year earlier, down from 6.5 percent in December, the Labor Department reported today. Prices increased by 0.5 percent from the previous month, up from the 0.1 percent monthly increase in December. The Core CPI, which is the measure of inflation that removes food and energy because of their volatility, rose 0.4 percent on a monthly basis and 5.6 percent annually. 


The report shows that despite inflation cooling annually, it’s more likely that the Fed will continue with their tactic of interest hikes, the strategy adopted to discourage spending in order to tame inflation, in the months to come. The question is now whether the Fed will take a more aggressive approach the next time they meet. 


One of the greatest contributors to the recent uptick are rising rent prices, which accounted for nearly half of the total increase. But that might stop soon. A side effect of the COVID-19 pandemic was remote work, so people moved to places with enough space to accommodate that increasing their rent or mortgage payments. This change takes time to be accounted for when measuring inflation because housing costs are measured every six months. 

In fact, housing costs might actually remain steady and won’t increase inflation in the months to come.


“The rental contracts are basically flat [now],” Millar said. “[There’s] no acceleration there.”


But even when rents level off there will be other components that might take their place like recreation services, medical care, or transportation services because wages continue to grow. When that happens, there’s more money to spend on products and services thus increasing prices, argued Oscar Munoz, US Macros Strategist at TD Securities USA..


Other increases are in areas of food and energy. The price of fuel rose too after months of decline. 


Last march, the Fed started raising interest rates in order to tame inflation that was way over the desired threshold of 2 percent. 


Inflation in the US surpassed that point in March 2021, reaching its highest point last June when it reached 9.1 percent. The interest hikes have lowered inflation since then, and until recently, it has seemed like prices were gradually returning to normal. 


But the latest CPI report – combined with the jobs report that came out on Feb. 3, which showed the economy added a whopping 517,000 jobs and hit a historic 50-year low unemployment rate –  are a signal that inflation is not yet under control, which could lead the Fed to decide that more needs to be done. The question now is if the Fed will increase only 0.25 percent or if it will go back to 0.5 percent increases as it did for four times last year.


The risk here is that those moves could send the economy into a recession. This happens because high interest rates, which increases borrowing costs, discourages production, investments and consumer spending. What the Fed is aiming for is to increase interest just enough that things level out without causing a recession. This is the so-called soft-landing.


“[The Fed] seem pretty confident and there’s still a certain amount of optimism, but you have to be mindful (referring to interest hikes) that you might over do it,” Millar said. 


Economists also add that what will provide a better perspective of what the Fed officials might do, or how aggressive they might be the next time they meet, is the Personal Consumption Expenditures (PCE) index, an alternative measure of inflation that the Fed prefers.

The report will be released on Friday, February 24, at 8:30 am E.T.


“CPI is important but the PCE report is also important because it [gets the] attention by the Fed,” Munoz said. “It could be what we saw today and probably stronger.”