Inflation cooled less than expected in January and showed worrying staying power after volatile food and fuel costs were stripped out — a reminder that bringing price increases under control remains a fraught, bumpy process.
The overall Consumer Price Index was up 3.1 percent from a year earlier, which was down from 3.4 percent in December but more than the 2.9 percent that economists had forecast. That figure is down from the latest peak of 9.1 percent in the summer of 2022.
But after stripping out food and fuel, which bounce around in price from month to month, “core” prices held roughly steady on an annual basis, climbing 3.9 percent from a year earlier. The measure jumped by the most in eight months on a monthly basis.
American consumers, the White House and Federal Reserve officials had welcomed a recent moderation in inflation. Central bankers in particular are likely to take the fresh report as a reminder that they need to remain cautious. Policymakers have been careful to avoid declaring victory over inflation, insisting that they needed more evidence that it was coming down sustainably.
Investors sharply pared back chances for an imminent Fed rate cut in reaction the data, betting that central bankers will not lower interest rates at their next meeting in March and sharply dialing back the odds that the Fed will do so even at its meeting in May. Stock markets tumbled — closing down 1.4 percent — as traders revised their forecasts for Fed actions.
Fed policymakers have raised interest rates to about 5.3 percent, up from near zero in early 2022, in a bid to cool consumer and business demand and force companies to stop raising prices so quickly. Because inflation has been coming down notably in recent months, they have paused their rate increases and are contemplating when and how much to lower borrowing costs.
But they want to avoid cutting rates before inflation is fully snuffed out, because they worry that doing so could allow rapid price increases to become a more permanent feature of the American economy.
“They were right to be patient, because this is the kind of number that is going to cast doubt on whether there really is a lot of deceleration in store for inflation,” said Omair Sharif, founder of Inflation Insights. “This is definitely a spooky number.”
Slower inflation over recent months had also been a welcome development for President Biden. Surging living expenses have eaten away at household budgets, weighing on voter confidence even though the job market is strong and wages are climbing at a brisk pace.
Naome Dunnell, 39, an educator in Newton, N.J., said she first started to notice a big jump in food prices more than a year and a half ago. Since then, she has had to buy less at the grocery store for herself and her four children. Ms. Dunnell said she was happy that food prices were not surging anymore, but was still frustrated by the high cost of groceries.
“The relief is not really there,” Ms. Dunnell said.
That unhappiness had appeared to be on the cusp of changing at a national level. Consumers have been starting to report feeling slightly more optimistic about the economy after six months of cooler price increases.
Now, the critical question for households and policymakers alike is whether more modest price increases can continue.
“Is it sending us a true signal that we are, in fact, on a path — a sustainable path — down to 2 percent inflation?” Jerome H. Powell, the Fed chair, said during his Jan. 31 news conference. “That’s the question.”
The Fed aims for 2 percent inflation on average using a separate but related measure, the Personal Consumption Expenditures index. That gauge is set for release on Feb. 29.
Part of the problem with Tuesday’s report, from the Fed’s perspective, is that the pickup in the core inflation index came from services: Prices for airfares, hotel rooms, haircuts and financial help all climbed in January. Service inflation tends to be driven by slow-moving forces like wage growth, and it can be very stubborn.
And while the hotter-than-expected inflation figures were just one month of data, they came alongside other evidence that the economy was growing more quickly than expected. Hiring picked up in January, wage growth was solid, and consumers continue to spend.
Some analysts have suggested that in an economy this hot, wrestling inflation the rest of the way to normal will prove more difficult than the progress so far. In other words, the “last mile” on inflation might be the toughest one. Tuesday’s report could give that argument more heft.
“It is too early to declare victory over inflation,” said Torsten Slok, chief economist at Apollo Global Management. He noted that key economic measures like hiring picked back up after the Fed hinted late last year that it was done with rate increases — evidence of the potential risks of backing off too early.
“The last mile will be harder,” Mr. Slok said.
So far, bringing inflation down has been less painful than economists had expected. Many had predicted that it would take a substantial cooling in the economy — and a jump in unemployment — to lower price increases. Instead, inflation has fallen gently even with a strong job market.
The improvement came partly as pandemic-roiled supply chains healed, allowing and goods inflation to cool. Used car prices fell outright in January, for instance.
Economists are now monitoring services prices as they try to gauge whether inflation is coming down sustainably — with housing in especially close focus.
Rents have climbed more slowly in recent months, and many analysts have been expecting that trend to continue as cheaper new leases feed into official inflation figures. Housing makes up such a big chunk of American spending that the expected cooling would help to lower overall inflation.
But January’s report offered a reason for caution. A measure that estimates how much it would cost to rent a house that someone owns — called owner’s equivalent rent — picked up.
For the inflation report as a whole, the takeaway is that the Fed “really needs to make sure that inflationary pressures will not re-accelerate before they can cut interest rates,” said Blerina Uruci, chief U.S. economist at T. Rowe Price.
Madeleine Ngo contributed reporting.