January 2023 consumer price index:

CPI rises 0.5% in January, more-than-expected and up 6.4% year-on-year

Inflation picked up in early 2023 as rising shelter, gas and fuel prices took a toll on consumers, the Labor Department said on Tuesday.

The consumer price index, which measures a broad basket of common goods and services, rose 0.5% in January, translating into an annual gain of 6.4%. Economists polled by Dow Jones expected increases of 0.4% and 6.2% respectively.

Excluding volatile food and energy, core CPI increased 0.4% mom and 5.6% year-on-year, versus respective estimates of 0.3% and 5.5%.

Markets were volatile after the launch, with Dow Jones futures virtually flat.

The increase in shelter costs accounted for about half of the monthly increase, the Bureau of Labor Statistics said in the report. The component accounts for more than a third of the index and rose 0.7% in the month and 7.9% year-over-year.

Energy also made a significant contribution, rising by 2% and 8.7%, respectively, while food costs rose by 0.5% and 10.1%, respectively.

Rising prices meant a loss of real wages for workers. Average hourly wages were down 0.2% on the month and down 1.8% from a year earlier, according to a separate BLS report.

While price increases have eased in recent months, January data shows that inflation is still a force in the US economy that is at risk of slipping into a recession this year.

This happened despite efforts by the Federal Reserve to stamp out the problem. The central bank has raised its benchmark interest rate eight times since March 2022, with inflation rising to its highest level in 41 years last summer.

In recent days, Fed Chair Jerome Powell has spoken about the “disinflationary” forces at play, but January numbers show the central bank likely still has work to do.

There was some good news in the report. Health care services were down 0.7%, airfares were down 2.1% and used car prices were down 1.9%, according to seasonally adjusted prices.

Rising house prices are keeping a floor below inflation, although those numbers are expected to slow towards the end of the year. That’s why some Fed officials, including Powell, say they are looking more closely at utility inflation minus shelter prices to determine the course of policy.

Markets expect the Fed to raise its overnight interest rate by another half a percentage point from its current target of 4.5% to 4.75%. This would give policymakers time to look at the broader economic impacts of monetary policy tightening before deciding how to proceed. If inflation doesn’t come down, that could mean more interest rate hikes.

There is widespread belief that the economy could slip into at least a shallow recession later this year or early 2023. However, the latest tracking data from the Atlanta Fed puts expected GDP growth at 2.2%. for Q1 after a relatively strong finish to 2022.

The January CPI report will take some time to analyze as the BLS has changed its methodology in how it reports the index. Some components, such as shelter, have been given higher weights, while others, such as food and energy, now have a slightly lower influence.

The Fed has also changed the way it calculates an important component called homeowners’ rent equivalent, a measure of how much a homeowner could get if they rented. The BLS is now putting a little more emphasis on pricing independent rentals rather than apartments.

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