US inflation slows to 6.4%, but price pressure resurfaces

WASHINGTON. Consumer price growth slowed again in January, the latest sign that the high inflation that has gripped Americans for two years is slowing down.

At the same time, the government’s report on consumer prices, released on Tuesday, showed that inflationary pressures in the US economy remain persistent and are likely to keep inflation high this year.

The government said on Tuesday that consumer prices rose 6.4% in January from 12 months earlier, compared with 6.5% in December. It was the seventh straight year-on-year slowdown and well below the recent peak of 9.1% in June. However, it remains well above the Federal Reserve’s annual inflation target of 2%.

And on a monthly basis, consumer prices rose 0.5% from December to January, much more than the 0.1% rise from November to December. More expensive gasoline, food and clothing pushed up inflation in January.

Last year, the Fed aggressively raised its benchmark interest rate to its highest level in 15 years in an effort to bring rampant inflation under control. The Fed’s goal is to slow borrowing and spending, slow hiring rates, and ease the pressure many businesses are under to raise wages to find or keep workers. Businesses typically pass on their higher labor costs to their customers in the form of higher prices, thereby fueling inflation.

So far, the slowdown in inflation is mainly due to looser supply chains and lower gas prices. But the Fed’s rate hikes – eight since March last year – have had little effect on the US labor market, which remains exceptionally strong.

On a monthly basis, however, inflation is expected to jump 0.5% from December to January, according to a survey of economists by data provider FactSet. This will be much faster than the 0.1% rise from November to December.

So-called core prices, which exclude volatile food and energy prices to provide a clearer picture of core inflation, are also expected to slow on a 12-month basis. They are forecast to rise 5.5% in January from a year earlier, compared to a 5.7% year-on-year growth in December.

But in January alone, economists estimate that benchmark prices jumped 0.4% for the second month in a row, roughly equivalent to a 5% annual pace, well above the Fed’s 2% target.

“The process of lowering inflation has begun,” Powell said in a speech last week. But “this process will probably take quite some time. It won’t be, we don’t think, smooth, it will probably be bumpy.”

Nationwide estimates that average gasoline prices, which have been declining in five of the past six months through December, are likely to have risen by about 3.5% in January. Food prices are also expected to rise, albeit more slowly than the huge spikes of last summer and autumn.

What’s more, spending on clothing and airfare is believed to have remained virtually unchanged from December to January. And economists have calculated that hotel room prices have plummeted.

Overall, the government’s inflation report is likely to show a continuation of the trend seen in recent months, with the cost of goods from furniture and clothing to toys and sporting goods falling. But prices for services — dining out, entertainment, dental services and the like — are rising faster than before the pandemic and threaten to keep inflation high.

Goods have become less expensive because supply chain problems that led to price gouging after the pandemic broke out in 2020 have been resolved. And Americans are channeling most of their spending on services after spending money on items like furniture and exercise equipment during the pandemic.

However, the average wage is growing at a fast rate of about 5% compared to last year. These wage increases, spread throughout the economy, are likely to drive up the prices of labor-intensive services. Powell has often cited the surge in wages as the factor driving service prices up and keeping inflation high, even though other categories, such as rent, are likely to fall in price.

The Biden White House last week calculated wages in the service sector, excluding housing, the sector of the economy that Powell and the Fed are watching most closely. The administration’s Board of Economic Advisers concluded that wages in these industries for workers excluding managers rose 8% in January last year from a year earlier, but have since slowed to about 5% year-on-year.

This suggests that services inflation may soon slow down, especially if this trend continues. However, wage growth at this level is still too high for the Fed. Central bank officials would prefer wage growth of around 3.5%, which they believe is in line with their inflation target of 2%.

The key question for the economy this year is whether unemployment needs to rise significantly to achieve this slowdown in wage growth. Powell and other Fed officials said that keeping high inflation in check would require some “sickness” for workers. Higher unemployment tends to reduce the pressure on businesses to pay higher wages.

However, at the moment the labor market remains historically very strong. Earlier this month, the government reported that employers added 517,000 jobs in January, nearly double the number in December. The unemployment rate fell to 3.4%, the lowest level since 1969. The number of vacancies remains high.

Powell said last week that employment data is “definitely stronger than everyone I know was expecting” and suggested that if such healthy numbers continue, more rate hikes than currently expected may be needed.

Other Fed officials, speaking last week, stressed that, in their opinion, a further increase in interest rates is expected. The Fed anticipates two more quarter-point rate hikes at its meetings in March and May. This increase will raise its base rate to a range of 5% to 5.25%, the highest level in 15 years.

The Fed raised its key rate by a quarter point at its last meeting on Feb. 1, after a half-point hike in December and four three-quarter-point hikes prior to that.

Financial markets see two more rate hikes this year and don’t expect the Fed to reverse course and cut rates until 2024. For now, those expectations have put an end to the standoff between the Fed and Wall Street investors, who had previously bet that the Fed would be forced to cut rates in 2023 as inflation falls faster than expected and the economy weakens.