• Consumer prices climbed 0.5% MoM in January

• CPI increases 6.4% YoY

• Core CPI rises 0.4% MoM; up 5.6% YoY

• January inflation report keeps Fed on track to continue rate increases

January’s CPI report underscored that the battle against inflation will not be quickly won. Consumer prices rose 0.5% MoM, the biggest monthly move since October, after tame gains of 0.2% and 0.1% in November and December, respectively. The strong outturn in January led the year-over-year inflation rate to tick down only slightly lower, signalling that consumer prices are stickier than expected. The latest consumer price report showed annual inflation dipped to 6.4% from 6.5% in  December – the seventh straight month of easing since peaking at 9.1% in June - but that price pressures in the US economy remain stubborn and are likely to fuel price increases well into this year. Excluding food and energy, core inflation increased 0.4% MoM in January and 5.6% YoY.

Housing costs, which rose by 0.7% MoM and 7.9% YoY, played a significant role in the results, providing about half of the inflationary boost during the month. Energy  (up 2% MoM and 8.7% YoY) and food prices (up 0.5% MoM and 10.1% YoY) also rose sharply. A 2.4% rise in gasoline prices ends a downward run that saw gasoline prices falling 24% over the second half of 2022 and played a meaningful role in the improvement of real income dynamics in recent months. Since peaking in June, headline CPI inflation has fallen 2.7 percentage points on a year-over-year basis,  with energy goods alone shaving off 2.3 points. At the same time, consumers have yet to benefit from plummeting natural gas prices, with energy services up 2.1%  in January. Grocery prices rose 0.5% MoM, up from 0.4% in the previous reading and remain more than 11% higher than a year ago.

Core goods prices increased a scant 0.1% in January. The normalization in used auto prices continued with prices falling 1.9% MoM, the seventh consecutive month of deflation. New vehicle prices also increased a relatively tame 0.2%. That said, not all goods’ categories posted disinflationary prints with apparel prices rose 0.8% and inflation for medical drugs and supplies jumped 1.1%. Overall, core goods inflation has slowed markedly over the past year, but the improvement has been primarily driven by vehicles.

Core services prices once again advanced faster than goods with a 0.5% rise in  January. Rent and owners’ equivalent rent growth each eased slightly but remained strong with gains of 0.7%. Travel-related services prices were mixed,  with lodging away from home up 1.2%, car rentals up 3.0% but airline fares down  2.1%. The core services ex-primary shelter measure that Fed Chair Powell and other FOMC members have cited as a “super-core” measure of inflation increased 0.4% MoM. The cost of services rose rapidly, up 7.2% YoY, the most since August  1982. Rental costs had their largest ever increase, rising 8.0% YoY. The cost of everyday living items such as food, fuel, clothing and shelter were all higher during the month but have moderated on an annual basis.

January inflation report keeps Fed on track to continue rate increases

Inflation eased for a seventh month straight in January, but interest rates will keep rising as the Fed works harder to root stubbornly high prices out of the economy. US consumer price inflation rose 0.5% MoM headline and 0.4% MoM at the core level (ex food and energy) in  January. The year-on-year rates slowed to 6.4% from 6.5% and 5.6% from 5.7% respectively.

The latest report underscored a key challenge facing the Fed - and the overall economy.  Prices are easing, a welcome reversal after 2022's eye-popping inflation rates. But finishing the job requires targeting some of the most persistent sources of inflation and keeping the pressure on. No part of the Fed's job until now has been easy, and the central bank had to scramble to get inflation down from 40-year highs last year. But price increases are still abnormally high, and getting them down to sustainable levels may require a level of pain that has so far been avoided.

In our view, inflation is still set to grind lower, but the process is likely to be bumpy and take time. Despite some directional improvement over the past couple of quarters, prices are still growing well-above the Fed’s 2% target, and the tight labor market suggests that there are still inflationary pressures that could forestall a full return to 2% inflation.

We continue to look for the FOMC to raise the fed funds rate by another 25 bps at both the  March and May meetings and to hold the target range at 5.00%-5.25% through the year’s end to ensure that high inflation will be quelled for good.

Source: BIMB Securities Research - 15 Feb 2023