U.S. consumer prices soared at the start of the year, dampening hopes for continued declines in inflation and raising the possibility that the Federal Reserve will delay any rate cuts.
Government figures released on Tuesday showed the so-called core consumer price index, which excludes food and energy costs, rose 0.4% from December, beating expectations and hitting its highest level in eight months. Compared to the same month last year, it increased by 3.9%, the same as the previous month.
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Economists support the core index as a better indicator of underlying inflation than the overall CPI. This indicator increased by 0.3% from December and 3.1% from the same month last year.
The numbers further reduce the already slim chance that Fed officials will start cutting rates soon, and further acceleration could reignite talks of raising rates again.
Some policymakers have said they want to ease broader price pressures before cutting rates.
Following the Bureau of Labor Statistics' announcement, the S&P 500 index opened lower and U.S. Treasury yields rose. Traders have pushed back bets on when the Fed will start cutting interest rates, cutting odds for March to near zero.
“The Fed will likely see this as another reason to wait until May or June, but the direction of the trend is still to the downside,” said Kathy Jones, chief fixed income strategist at Charles Schwab. “Much of the increase is due to housing, and it's a waiting game to see when those costs come down,” she said.
The numbers reflected higher prices for food, auto insurance and health care, with shelter costs accounting for more than two-thirds of the overall increase. Hospital outpatient services and pet services both posted their largest increases in the month on record.
After the methodology was updated, used cars saw the largest monthly decline since 1969. Broader commodity prices and energy also continued to fall, highlighting policymakers' concerns that recent disinflation is concentrated in a few categories.
| metric | actual | estimate |
| CPI m/m | +0.3% | +0.2% |
| Core CPI m/m | +0.4% | +0.3% |
| CPI year-on-year change | +3.1% | +2.9% |
| Core CPI YoY | +3.9% | +3.7% |
Last week's annual BLS revision confirmed that inflation is receding as fast as originally reported at the end of 2023.
However, the new weighting, effective as of January's data, will focus on services rather than goods, which economists believe will give a slight boost to this year's CPI outlook.
Prices for shelter, the largest category of services, rose 0.6%, the highest level in nearly a year. Economists see continued moderation in this area as key to bringing core inflation down to the Fed's target.
What Bloomberg Economics says…
“January's CPI report shows that getting inflation back to 2% will not be a smooth road…Our base case is that the Fed begins cutting rates in May. If the troubling signs in this report persist, the risk of inflation returning to 2% will further increase.'' Cuts will rise later. ”
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– Anna Wong and Stuart Paul
Prices for services excluding housing and energy rose 0.8% from December, the most since April 2022, according to calculations by Bloomberg's index known as Supercore. Although policymakers emphasize the importance of focusing on these indicators when assessing a country's inflation trajectory, they base their calculations on other indicators.
This measure, known as the Personal Consumption Expenditure Price Index, focuses less on housing than the CPI. This is one reason why PCE tends to move much closer to the Fed's 2% goal.
The Producer Price Index, released on Friday, will provide further clues as some categories within that report are directly reflected in PCE calculations.
PCE statistics for January are expected to be released later this month.
Unlike services, the sustained decline in commodity prices over much of the past year has provided some reassurance to consumers. Prices of so-called core goods, excluding food and energy products, fell by the most since July.
Fed officials will have access to multiple inflation reports, including another CPI printout, before their next policy meeting on March 19th and 20th.
Wall Street has been calling for the central bank to start cutting rates, but policymakers have indicated they are likely to keep rates unchanged for the fifth consecutive meeting.
That's partly due to the strength of the job market. A separate report on Tuesday showed real incomes rose by the most on an annual basis since July, extending a multi-month streak of wage growth narrowly outpacing inflation.
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