January Inflation was 0.5% Higher than Expected and 6.4% Higher than a Year Ago

There was an increase in inflation in 2023, as rising fuel, shelter, and gas prices took a toll on consumers, the Labor Department reported on Tuesday.

‍

A broad basket of consumer goods and services, known as the consumer price index (CPI), increased by 0.5% in January, translating into an annual increase of 6.4%. It is worth noting that economists surveyed by Dow Jones were expecting a 0.4% and a 6.2% increase respectively.

‍

Taking volatile food and energy out of the equation, the core CPI increased by 0.4% monthly and 5.6% from a year ago, against estimates of 0.3% and 5.5%, respectively.

‍

A volatile market followed the release of the report, with Dow Jones futures around flat following the release.

‍

In a report also released by the Bureau of Labor Statistics, the Bureau of Labor Statistics noted that rising shelter costs accounted for about half of the monthly increase. More than one-third of the index is accounted for by this component, which rose by 0.7% on the month and by 7.9% when compared with a year ago. During the month of December, there was an increase of 0.1% in the CPI.

‍

There were also significant increases in energy costs, which rose by 2% and 8.7%, respectively, while food costs rose by 0.5% and 10.1%, respectively, due to rising production costs.

‍

It was due to rising prices that workers lost real wages a result. According to a separate report from the Bureau of Labor Statistics, average hourly earnings fell 0.2% in February from a year earlier and are down 1.8% from a year ago.

‍

The U.S. economy has been on the verge of recession this year, although price increases have abated in recent months. January's data shows that inflation is still a force to be reckoned with in an economy in danger of entering a recession.

‍

The Federal Reserve has been unable to quell the problem despite efforts to do so. During the summer of 2018, when inflation reached its highest level in 41 years, the central bank raised its benchmark interest rate eight times, as part of its effort to combat inflation.

‍

Fed Chairman Jerome Powell has been talking in recent days about "disinflationary" forces at play, but the January numbers indicate that the central bank is probably still facing some challenges.

‍

The report contained some good news as well as some bad news. In terms of seasonally adjusted prices, medical care services fell by 0.7%, airline fares fell by 2.1%, and used vehicle prices fell by 1.9% as well.

‍

The rise in housing prices has acted as a floor under inflation as a whole, however, those numbers are widely expected to decelerate later in the year due to the aging population. There is a reason why some Fed officials, including Powell, say they are looking more closely at core services inflation minus shelter prices in determining the appropriate course of action when it comes to determining monetary policy.

‍

It is expected that the Fed will raise its overnight borrowing rate another half a percentage point from the current range of 4.5%-4.75% that it has set as its target range. By doing so, policymakers would be able to observe how the tightening of monetary policy affects the broader economy before making a decision on what to do next. There is a possibility that more rate hikes could be necessary if inflation fails to fall back.

‍

Most economic experts believe that the economy could tip into a shallow recession by the end of this year or early in 2023, at the very least. After a relatively strong finish for 2022, the Atlanta Fed predicts GDP growth for the first quarter of 2.2%.

‍

The BLS has changed its methodology on how it reports the CPI for the month of January, which will require a little bit more time to analyze, as some of its components, such as shelter, are being given higher weightings, while others, such as food and energy, have been given slightly fewer weightings.

‍

The Federal Reserve has also changed how it calculates the owners' equivalent rent, a measure of how much a property owner could expect to earn if he or she rented out their property. The Bureau of Labor Statistics has placed a bit more emphasis on pricing stand-alone rentals than apartments in its calculations.