Inflation Slows in January, Fed Expected to Keep Raising Rates
By Inflation continued to slow in January, coming in at 5.4% year-over-year, according to the latest data from the U.S. Bureau of Labor Statistics.[0] The 0.5% monthly increase in prices was higher than the 0.4% monthly increase expected by economists.[1] The Core Consumer Price Index, excluding food and fuel prices, increased by 0.4% in January, the same rate as in December.[2] From January of the previous year to January of the current year, this index increased by 5.6%.[3]
The slowdown in inflation has prompted markets to shift expectations for the Fed raising rates higher and holding them in place longer. The CME FedWatch Tool shows that most traders anticipate the federal-funds effective rate target to increase to 5.50% in the summer, higher than the earlier forecast of 5.25%.[4] At the conclusion of the year, the market anticipates the Federal Reserve trimming the funds rate to 5.25% by December, rather than retreating to 4.75%.[4]
In the month of June, the biggest increase in the Producer Price Index (PPI) – a measure of what raw goods cost in the open market – was recorded at 0.7%.[5] Dow Jones surveyed economists who were expecting a 0.4% increase following a 0.2% decrease in December.[5] Prices for shelter, food, gas, and natural gas all increased in January, with shelter accounting for nearly half of the monthly all items increase.[6]
For Fed Chair Jerome Powell, shelter inflation — a “stickier” component of CPI that has remained stubbornly high — is a key component of evaluating the path forward for interest rates. In a sit-down interview last week in Washington, D.C., Powell said he expects housing inflation to fall in the middle of the year and that he intends to keep interest rates higher until inflation gets closer to that 2% target. He stated that the Federal Reserve and Powell are probably going to keep increasing rates.
Overall, the January CPI report indicates that the Federal Reserve still has work to do to tame inflation.[2] The report, combined with the much stronger than anticipated January employment report, indicates that the Fed may have to hike rates this year by more than what markets anticipate. It is anticipated that the Federal Funds Rate will reach 5% without any reductions in 2023 for credit unions.[2] This story is still unfolding.[3] Be sure to revisit for new information.[3]
0. “Grocery Inflation Slows in January, but Remains High” TIME, 14 Feb. 2023, https://time.com/6255258/inflation-grocery-prices-rise
1. “Amid inflation crisis, prices of some items are falling” ABC6OnYourSide.com, 15 Feb. 2023, https://abc6onyourside.com/news/local/amid-inflation-crisis-prices-of-some-items-are-falling-consumer-money-wallet-spending-eggs-butter-lettuce-chicken-airfare-steaks-bacon-computers
2. “January CPI Report: What the Experts Are Saying About Inflation” Kiplinger's Personal Finance, 14 Feb. 2023, https://www.kiplinger.com/investing/january-cpi-report-what-the-experts-are-saying-about-inflation
3. “Consumer prices rise at faster pace in January” Axios, 14 Feb. 2023, https://www.axios.com/2023/02/14/cpi-january-inflation-report-2023
4. “January CPI Report Shows Sticky Inflation Is Back” Morningstar, 14 Feb. 2023, https://www.morningstar.com/articles/1137589/january-cpi-report-shows-sticky-inflation-is-back
5. “Wholesale Prices Rose 0.7% in January, More Than Expected Fueling Inflation Increase” NBC Southern California, 16 Feb. 2023, https://www.nbclosangeles.com/news/business/money-report/wholesale-prices-rose-0-7-in-january-more-than-expected-fueling-inflation-increase/3097522/
6. “Inflation eased again in January – but there's a cautionary sign” NPR, 14 Feb. 2023, https://www.npr.org/2023/02/14/1156542026/inflation-prices-recession-economy-federal-reserve
