U.S. price growth cooled in January, slowing to 3.1% from 3.4% on a 12-month basis, the Bureau of Labor Statistics reported on Tuesday.
Excluding food and gas prices, the “core” price increase was 3.9% compared to December.
While inflation continued to slide downward last month, the January data missed expectations for a stronger slowdown: Economists polled ahead of the report had expected a reading of 2.9%. They also expected a lower reading for the “core” reading at 3.7%.
The data showed unexpected increases in shelter costs, including rent and home ownership. These are up more than 6% on a 12-month basis.
However, Paul Ashworth, chief U.S. economist at research group Capital Economics, said in a note to clients that given more recent measures of rent growth, such increases may not continue.
“There is still considerable inflation in the economy,” Ashworth writes.
Still, Tuesday’s report is another sign that high inflation continues to plague parts of the U.S. economy.
Although the pace of 12-month price increases has slowed from the double-digit highs reached in the summer of 2022, American consumers are still facing higher prices than before the pandemic.
With few exceptions, economists agree that these high price levels are here to stay. The question now is how quickly inflation for consumer goods and services will continue to slow.
High price tolerance
Still, consumers are adjusting to the new normal of higher prices. NBC News recently covered it How the price of fast food, traditionally seen as a refuge from high-priced food, has increased in the post-pandemic era.
“Eating at home has become more affordable,” McDonald’s CEO Chris Kempczinski said on a call with analysts last week, noting that consumers making $45,000 a year or less are particularly price sensitive. “The battleground is certainly with the low-income consumer.”
Home food price growth slowed sharply to just 1.3% on a 12-month basis in December after a massive rise amid the outbreak of war in Ukraine.
By comparison, the price of food away from home rose slightly more than 5% on a 12-month basis in December.
Despite recent differences, food prices in both categories the same has increased by 25% since the start of the pandemic. This is one reason why consumer confidence has lasted so long has risen again in the post-pandemic period, and overall indicators remain below pre-pandemic levels.
Going into Tuesday’s report, economists said that while the Federal Reserve’s official target of 2% annual inflation is likely to show a marginal improvement, robust economic growth will lift the pace of price increases.
“We continue to see a difficult path back to 2 percent inflation, absent a more significant easing in the labor and housing markets,” Citibank economists wrote in a note to clients on Monday.
In other words, slower price growth may come at the cost of higher unemployment.
Citi analysts say that unless the labor market weakens, inflation could remain above the 2% target, given that wages and home prices remain high.
Hurry up and wait
If so, lower interest rates may not start to materialize until late summer or early spring. In his latest remarks, Federal Reserve Chairman Jerome Powell said he needs to see more confidence that inflation is slowing meaningfully. Powell also noted that a rate cut in March is highly unlikely.
After March, the Fed’s next opportunity to announce a rate cut will be May 1. But Citi analysts say another meeting may be needed before the first rate cut comes in June.
Analysts at Bank of America also see June as the most likely month for the first rate cut after the end of the pandemic. In a note to clients on Monday, they said data from January would help Fed officials make the case for a rate cut in June, but would not be decisive on its own.
Meanwhile, the main political victim of high inflation remains President Joe Biden. In the latest NBC News pollBiden’s primary challenger, Republican former President Donald Trump, had a 22-point lead on the question of which presidential candidate would do a better job of managing the economy, with 55% choosing Trump and 33% choosing Biden.
A separate survey published last month by Harvard CAPS-Harris found that immigration It has outpaced inflation as the the main concern among voters polled – but inflation still ranks second.
Over the weekend, Biden called on corporations to curb the trend of “shrinkage” by imposing the same prices on smaller-sized items. The report by Sen. Bob Casey, D-Pa. found household paper products were 34.9% more expensive than in January 2019, and about 10.3% of this increase was due to manufacturers reducing the size of rolls and packages.
As for how Trump will fight inflation, liberal and conservative economists say some of his proposals — notably adding foreign tariffs on imports and restricting immigration — could actually reignite it. Trump has also vowed to replace Powell, who he nominated in 2017, as chairman of the Federal Reserve, but Trump said Powell believed in “helping Democrats” by cutting interest rates before November. The 2024 election is an unfounded claim.
The Fed has historically tried to shield itself from political pressure and has not commented on Trump’s remarks.