Bidenflation Resurgent: Consumer Prices Rise Faster Than Expected, Putting Fed Cuts in Doubt

Inflation unexpectedly accelerated in January, with the prices rising faster than expected as the new year began.

The consumer-price index, the Labor Department’s broad measurement of what consumers pay for goods and services, rose 3.1 percent from a year earlier.

Economists were expecting a year-0ver-year increase of 3.0 percent. The 12-month price rise was 3.4 percent in December.

Compared with the prior month, the CPI was up 0.3 percent. Economists had forecast inflation to climb 0.2 percent, the same rate of inflation reported for December.

Federal Reserve officials have said they look at several months of data to detect trends in inflation. The three month annualized core inflation rate rose to four percent in January from 3.3 percent. The six-month annualized core rate rose to 3.6 percent from 3.2 percent. Both indicate a trend of rising inflation well above the level the Fed says is compatible with a healthy economy.

The one-month rate annualized is 4.8 percent, an indication of how high the monthly inflation figure is. In other words, if inflation were to run at the same pace it did in January for 12 months, the annual inflation would be 4.8 percent.

Consumer inflation hit its recent peak of 9.2 percent in June of 2022 and has since retreated as the Federal Reserve raised interest rates at a record pace and the Biden administration’s spending was reined in by lawmakers worried about extraordinarily large budget deficits. The unsnarling of supply chains has been a major disinflationary force in the prices of goods.

Despite the expiration of pandemic stimulus and the Biden administration’s post-pandemic spending spree through the American Rescue Plan and the Inflation Reduction Act, the federal government has continued to run very large budget deficits. This very expansive fiscal policy has likely undermined a good deal of the effect of higher interest rates, keeping inflation elevated.

Core prices, which exclude food and energy prices, rose 0.4 percent, compared with the 0.3 percent forecast by analysts and the 0.3 percent reported for December.  Compared with a year ago, core prices are up 3.9 percent. Economists had forecast a 3.7 percent increase. In December, core prices were up 3.9 percent for the year.

The market had been pricing in a rate cut from the Federal Reserve as early as May but the odds implied by market prices were declining over the past week. After the CPI report, the odds of a May cut fell to around 35 percent.

The market had been pricing in a near certainty of a rate cut by the June meeting. The odds of a June cut fell to around 76 percent immediately after the release of the CPI figures.  A few weeks ago, the market was pricing in six cuts for the year. Now the market appears to expect four cuts with a longshot chance of a fifth cut.

The major stock indexes fell sharply after the inflation news was released, likely because

Prices of food rose 0.4 percent in January, with grocery prices rising 0.4 percent and dining-out prices rising 0.5 percent. At the end of last year, prices were rising at a much milder 0.1 percent for groceries and 0.3 percent in restaurants. Food prices are up 2.6 percent over the past year.

Energy prices fell in January, declining by 0.9 percent on a month-to-month basis, pushing down the overall index. The energy index is down 4.6 percent from a year ago.

Goods prices have continued to fall, easing the overall index. In January, prices of goods excluding energy goods fell 0.3 percent, the third consecutive monthly decline. Compared with 12 months ago, core goods prices are down 0.3 percent.

Services prices are rising at a rapid rate. In January, services prices rose 0.7 percent, the fastest pace of price increases since September 2022 and close to that year’s peak in inflation. Compared with a year ago, core services prices are up 5.4 percent.

The Fed watches the CPI closely but uses a different measure, the personal consumption expenditure (PCE) price index, as its official measure of price stability. It targets an annual rise of two percent in the PCE index. In December, the PCE price index was up by 2.6 percent and core PCE prices were up 2.9 percent.

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