Consumer price data surprised economists with a surge in prices for services, underscoring the bumpiness of the road towards slower inflation.
Prices rose 3.1% in January from a year earlier, compared to 3.3% in December, the Labor Department said Tuesday. That was higher than what economists surveyed by Bloomberg predicted at 2.9%. Core prices stayed locked at 3.9% for January, just as in December, yet housing spiked unexpectedly to 0.6%.
Although stubborn, inflation is cooling down. Prices are rising at half of last January’s 6 percent rate and a strong jobs report, burgeoning economy, and steady consumer spending also reflect a positive outlook in the broader economy. Yet higher than expected prices this month could make Federal Reserve officials more cautious about cutting interest rates too soon.
“The last mile will be no easy glide,” said Carl Riccadonna, Chief US Economist at BNP Paribas at a press conference on Feb 13, referring to the last percentage points needed to bring inflation down to the Fed’s target of 2%, “and there is no rush to cut rates aggressively.”
The Fed has weighed whether to cut interest rates or hold them at their current level of 5.25-5.5% — the highest since 2007. They’re attempting to achieve a soft landing, whereby inflation cools and the economy continues to grow. Economists expect the Fed to start cutting rates as soon as this May.
The Fed will be closely monitoring another measure of inflation, the Personal Consumption Expenditure price index (PCE), later this month to determine their next steps on monetary policy, and whether desinflation trends hold well enough to cut rates.
The surge in prices in January was largely driven by an increase in the services sector, which grew by 0.7% from a month earlier — the fastest pace since Sept. 2022, while the price of goods continued to fall. Services prices such as medical care and transportation rose, adding to inflation.
The stock market also fell on the news that day, as investors pulled off on investment. But what surprised economists and investors most were sticky housing prices, a key inflationary measure that was expected to come down in 2024, but hasn’t so far.
“That was the smoking gun,” said Jay Bryson, Chief Economist at Wells Fargo.
Part of the reason, Bryson said, is that shelter accounts for over one third of the Consumer Price Index, which means any increase in housing price is heightened in the overall price index. But housing prices, which are measured as rent costs in the CPI, are known to lag, and cooler prices are expected to reflect later on, which private company data supports.
“We know rent inflation will slow because we’ve got great visibility on that with private sector data, it’s just taking longer to come through in the official data,” said James Knightly, Chief International Economist at ING.