CPI inflation rate eases in January, up 0.5% MoM

The inflation rate for January shows a de-acceleration of inflation for the seventh consecutive month, with the relief attributed to lower costs for used vehicles. The consumer price index data, released on Tuesday, indicates a 6.4% increase in prices of goods and services over the past twelve months, down from December’s annual rate of 6.5%. The monthly report, however, shows a rise of 0.5% in January, compared to 0.1% in December, driven by shelter costs.

The escalation in prices has affected Americans since last year, causing a drop in the real value of their income despite wage increases. It has also increased the risk of a recession. With concerns that the economy remains too hot, and an inflation target of 2% to be met, the Federal Reserve may need to continue hiking rates higher and for longer than expected.

Gregory Daco, the Chief Economist at EY, believes that annual inflation will fall to 2.3% by the end of the year, with core inflation set to fall to 2.8% by then. Bright MLS’s Chief Economist, Lisa Sturtevant, believes home prices rising much faster than incomes has contributed to the rise in inflation.

In January, new changes were implemented to adjust for changing consumer spending patterns, with the index taking into account the portion of the typical American’s budget each category takes up, meaning the overall index reflects proportional price changes. Housing now accounts for 44.4% of the index, with shelter up to 34.4% from 33.3%, and rent rising to 25.4% from 24.3%. The report’s release led to the S&P 500 falling 1.2 points or 0.03%.

While the Federal Reserve does not convene for another month, the index report combined with the latest jobs report will likely lead the Fed to raise interest rates by 25 basis points for the second time this year. Although the inflation rate is decreasing, it is not showing signs of rapidly returning to the target rate, according to John Leer, the Chief Economist at Morning Consult. Bill Adams, the Chief Economist at Comerica Bank, predicts that the report will not be sufficient for the Fed to stop raising interest rates, as the inflation target still needs to be met.