Consumer prices soared more than predicted over the last 12 months, signaling a worsened forecast for inflation and solidifying the possibility of major interest rate rises this year.
Consumer prices, as measured by the Labor Department’s Consumer Price Index, increased 7.5% in January compared to the same month a year earlier.
That was lower than what was predicted by the Dow Jones for the widely followed inflation indicator, which was 7.2%. As far back as records go, February 1982 was the last time the number had been this high.
However, after excluding the effects of gas and food price volatility, the CPI rose by 6%, above expectations of a 5.9% rise. Since August 1982, core inflation has increased at an unprecedented rate.
There was also a surprise increase in the monthly CPI rates, with both the headline and core CPI increasing by 0.6% against predictions for just 0.4% growth.
Following the release of the report, stock market futures fell, with rate-sensitive technology firms taking the most impact. The yield on the benchmark 10-year Treasury note reached 2%, the highest level since August 2019.
Additionally, the markets were more bullish about the likelihood of future rate increases.
CME data shows that the probability of a March rate hike of 0.5 percentage points by the Federal Reserve increased to 44.3% after the release of the data, from 25% before. After the publication, the odds of a rate increase in the sixth quarter of this year increased to about 63% from around 53%.
“With another unexpected uptick in inflation in January, investors continue to be apprehensive about an aggressive Fed,” said Barry Gilbert, asset allocation strategist at LPL Financial. Until there are convincing indicators inflation is coming under control, market worry over possible Fed overtightening will persist, even if things may start looking up from here.
Rising Cost of Necessities Such as Food and Housing
U.S. economic growth is likely to moderate this year from its high pace in 2021 as fiscal and monetary stimulus disappears, making 2019 a pivotal year for inflation data. Above-trend growth is still anticipated, but inflationary pressures and the Federal Reserve’s plan to combat them might lead to rate hikes that are more pronounced than currently anticipated.
Fuel oil prices increased by 9.5% in January, contributing to a 46.5% annual rise. Overall, the price of energy increased by 0.9% last month and by 27% over the previous twelve months.
The price of automobiles, which has been steadily rising since the spring of 2021, was stable for brand-new models but up 1.5% for pre-owned vehicles in January. Over the previous 12 months, each of those sub-fields saw growth of 12.2% and 40.5%, respectively.
The cost of housing, which accounts for approximately a third of the overall CPI statistic, rose by 0.3% from the previous month, the lowest monthly increase since August 2021 and just below the increase seen in December. Nonetheless, annual growth of 4.4% in this sector suggests that future inflation readings may remain over target.
The price of food increased by 0.9% month-to-month and by 7% year.
As a result of rising costs in both the housing market and food production, “underlines our assessment that a significant cyclical acceleration in inflation is begun and, with labor market conditions exceedingly tight, it is unlikely to abate any time soon,” stated Andrew Hunter, senior U.S. economist at Capital Economics.
He noted that this indicated that core inflation would continue considerably over the Fed’s goal for some time, despite expectations that it would fall this year due to more favorable base effects and a partial easing of supply constraints.
The sharp increase in prices has dampened the significant wage rise that employees have seen. The 0.7% monthly gain in wages was almost entirely offset by the 0.6% inflation gain, leading to a 0.1% increase in real average hourly earnings for the month.
Claims for unemployment insurance dropped by 16,000 in the week ending February 5, according to a separate data released on Thursday. The resulting total of 223,000 was lower than the 230,000 prediction. Since January 1st, this was the lowest sum.
For the last week, the number of people filing new claims for unemployment insurance has remained steady at 1.62 million. According to statistics from the Labor Department through January 22nd, the overall number of people getting benefits across all programs increased slightly to over 2.1 million.