Rents push up U.S. consumer prices; inflation gradually cooling

By Lucia Mutikani; Edited by News Gate Team

Reuters, Feb. 14, Washington – Consumer prices in the United States increased in January as people continued to pay higher rent and food prices, indicating that the Federal Reserve was not about to stop raising interest rates.

The pace of deflation in the annual consumer price measures slowed last month, according to the report released by the Labor Department on Tuesday. However, the Fed is likely to continue raising interest rates at a moderate pace given the inflation deceleration that has sustained over time. Some experts predict that the U.S. central bank may continue raising rates over the summer due to persistently high inflation and an inflexibly tight labor market.

The rate of inflation is decreasing, but getting there won’t be easy, according to Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina. The Fed won’t rely judgments on a single report, but it is becoming increasingly likely that inflation won’t slow down quickly enough for the Fed to be satisfied.

After rising by 0.1% in December, the consumer price index jumped by 0.5% last month. Nearly half of the monthly increase in the CPI was attributable to a 0.7% increase in the cost of shelter, which was mostly driven by rents.

Rising gasoline costs, which increased 2.4% after falling for two consecutive months, also contributed to the increase in inflation. Electricity and natural gas were also more expensive for Americans.

Food costs increased as well; they increased by 0.5% after rising by 0.4% in December. The price of food that is eaten at home increased by 0.4%, helped by increases in the cost of meat, fish, and eggs. Fruits and vegetables cost less, whereas cereals, bread items, and nonalcoholic beverages all saw price increases.

The CPI rose in January, which was in line with what economists had predicted. According to economists, some of the increase in the monthly CPI was due to price increases at the beginning of the year, which were mostly seen in the 1.2% increase in motor vehicle fees and the 2.1% increase in prescription medicine prices.

The seasonal factors tend to underestimate inflation at the beginning of the year when price resetting is more common, according to economists at Goldman Sachs. “In today’s higher-inflation environment, firms are likely to implement larger price increases when they reset their prices than they normally would when inflation was low and stable,” they wrote.

The seasonal adjustment variables, a methodology used by the Bureau of Labor Statistics (BLS) of the Labor Department to remove seasonal changes from data, were also revised.

With the publication of the January report, the spending weights used to compute the CPI were also adjusted. For the report in January, the new weights, which reflect consumer spending in 2021, were viewed as inflationary. The weights for transportation and food have decreased, while housing now makes up a larger portion of the CPI.

The CPI rose 6.4% during the past 12 months to January. It came after a 6.5% increase in December and was the weakest gain since October 2021. The slight slowing in the year-over-year CPI is explained by the revisions to the CPI for 2022.

The annual CPI increased the most since November 1981, reaching a peak of 9.1% in June.

President Joe Biden said in a statement that the CPI report “reinforces that we have made historic progress and are on the right track, and now we need to finish the job.”

Stocks on Wall Street were trading lower. The dollar was steady versus a basket of currencies. U.S. Treasury prices fell.

A BREAK IN GOODS DEFLATION
The annual inflation rate has moderated as a result of stronger supply chains and tighter monetary policy, which is impacting demand. However, it will take some time for inflation to return to the Fed’s 2% target.

Since last March, the Fed has increased its policy rate by 450 basis points, moving it from near zero to a range of 4.50%–4.75%, with the majority of the hikes occurring between May and December. In March and May, two further rate increases of 25 basis points are anticipated. The financial markets anticipate a further rise in June.

Kathy Bostjancic, chief economist of Nationwide, warned that there is a likelihood of more rate increases.

Excluding the volatile food and energy components, the CPI increased 0.4% after rising 0.4% in December. In addition to the 0.7% advance in owners’ equivalent rent (OER), a measure of the amount homeowners would pay to rent or would earn from renting their property, the so-called core CPI was also supported by higher prices for apparel. OER increased 0.8% in December.

Independent measurements, however, indicate that rental inflation is slowing, which has many analysts anticipating a significant slowdown in price pressures in the second half. The CPI rent measures typically lag behind the independent gauges.

Medical expense growth was 0.4%. After increasing 0.1% in December, the CPI increased 0.2% when food, shelter, and energy were excluded. While the cost of clothing grew 0.8%, it was the highest increase since December 2021, while the price of secondhand vehicles and trucks dropped 1.9%. For the first time since August, core goods prices increased 0.1%.

After increasing 5.7% in December, the core CPI increased 5.6% during the preceding 12 months to January, which was the weakest gain since December 2021.

“We continue to look for inflation to trend lower, but we believe getting back to an inflation rate the Fed can live with on a sustained basis will neither be quick nor painless,” said Sarah House, a senior economist at Wells Fargo in Charlotte, North Carolina.

By Lucia Mutikani; Edited by News Gate Team