Shopper Value Index January 2023:

Inflation surged in early 2023 as rising prices for housing, gas and fuel took their toll on consumers, the Labor Department reported on Tuesday.

The consumer price index, which measures a broad basket of common goods and services, rose 0.5% in January, up 6.4% for the year. Economists polled by Dow Jones had expected corresponding increases of 0.4% and 6.2%, respectively.

Excluding volatile food and energy, core CPI rose 0.4% monthly and 5.6% year-on-year, versus estimates of 0.3% and 5.5%, respectively.

Markets were volatile following the release, with the Dow Jones industry average about 200 points on the open and on the way down.

Rising housing costs accounted for about half of the monthly increase, the Bureau of Labor Statistics said in the report. The component accounts for more than a third of the index and is up 0.7% for the month and 7.9% year-on-year. The CPI was up 0.1% in December.

Energy was also a major contributor, up 2% and 8.7% respectively, while food costs rose 0.5% and 10.1% respectively.

Rising prices meant a loss of real wages for workers. Average hourly wages fell 0.2% for the month and 1.8% year-on-year, according to a separate BLS report, which adjusts wages for inflation.

While price increases have eased in recent months, January data shows that inflation is still a force in a US economy at risk of slipping into recession this year.

This came despite Federal Reserve efforts to quell the problem. The central bank has raised interest rates eight times since March 2022, when inflation rose to a 41-year high last summer.

“Inflation is slowing, but the path to lower inflation is unlikely to be smooth,” said Jeffrey Roach, chief economist at LPL Financial. “The Fed will not make decisions based on just one report, but the risks are clearly increasing that inflation is not cooling fast enough for the Fed to like.”

For the past few days, Fed Chair Jerome Powell has been talking about “disinflationary” forces, but January’s numbers show the central bank likely has work to do.

The report contained some good news. Medical services fell 0.7%, air fares 2.1% and used car prices 1.9%, according to seasonally adjusted prices. However, egg prices rose by 8.5% and last year by an impressive 70.1%.

Assessing “super core” inflation

The rise in house prices is keeping inflation under control, although there is a general expectation that these numbers will slow later in the year.

That’s why some Fed officials, including Powell, say they’re looking more closely at core services inflation minus housing prices — “super-core” — to guide policy course. That number rose 0.2% in January, up 4% year-on-year.

Markets expect the Fed to raise its federal funds rate by another half a percentage point from its current target range of 4.5% to 4.75% at its next two meetings in March and May. That would give policymakers time to monitor the broader economic implications of monetary tightening before deciding how to proceed. If inflation doesn’t come down, that could mean more interest rate hikes.

Dallas Fed President Lorie Logan warned on Tuesday that the central bank may have to push rates higher than expected, particularly if the super-core market remains anchored in the 4% to 5% range.

“We must remain prepared to continue raising interest rates for a longer period of time than previously anticipated if such a path is necessary to respond to changes in the economic outlook or to offset an unwanted easing of conditions,” she said during a speech in Prairie View. Texas.

Logan, this year a voting member on the rate-setting Federal Open Market Committee, added that she is concerned about higher commodity inflation if China reopens from its Covid lockdowns and sees the surprisingly strong labor market as another risk.

“When inflation repeatedly comes in higher than forecasts, as it did last year, or when the jobs report comes in with hundreds of thousands more jobs than anyone expected, as happened a few weeks ago, it’s hard to have confidence in any prospect to have,” she said.

recession possible

The next big data point will be retail sales, which arrives at 8:30 a.m. ET on Wednesday morning. Economists polled by Dow Jones expect the uninflation-adjusted figure to show January sales rose 1.9% mom.

“The strength of core inflation suggests the Fed still has work to do to bring inflation back to 2%,” said Maria Vassalou, co-chief investment officer for multi-asset solutions at Goldman Sachs Asset Management. “If retail sales also show strength tomorrow, the Fed may need to raise its interest rate target to 5.5% to tame inflation.”

It is widely believed that the economy could slide into at least a shallow recession later this year or in early 2023. However, the latest Atlanta Fed tracking data puts expected Q1 GDP growth at 2.2%, after a relatively strong end to 2022.

A New York Fed barometer, which uses the spread between 3-month and 10-year Treasury yields to estimate the likelihood of a recession, puts the probability over the next 12 months at 57.1%, the highest since early 1980s.

Analysis of the January CPI report will take time as the BLS has changed its methodology for reporting the index. Some components, such as g. accommodation, were weighted higher, while others, e.g. such as food and energy, now have a slightly smaller impact.

The Fed also changed how it calculates a key component called owner-equivalent rent, a measure of how much homeowners could get if they rented. The BLS now places a little more emphasis on the pricing of individual rentals than on apartments.

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