Inflation eased for a seventh month straight in January, but interest rates will keep rising as the Fed works harder to root stubbornly high prices out of the economy.<\/p>\n
Data released by the Bureau of Labor Statistics on Tuesday morning showed prices rose 6.4 percent in January compared to the year before. That marked a slight step down from the 6.5 percent rate notched in December, and a drop from last summer\u2019s peak of 9.1 percent. It was also the smallest 12-month increase since October 2021.<\/p>\n
The report showed January prices rose 0.5 percent in comparison with the previous month, a bump from the 0.1 percent rise in the December report, and a less-than-encouraging sign for economists and policymakers who argue that progress is best measured month by month.<\/p>\n
The latest report underscored a key challenge facing the Fed \u2014 and the overall economy. Prices are easing, a welcome reversal after 2022\u2019s eye-popping inflation rates. But finishing the job requires targeting some of the most persistent sources of inflation and keeping the pressure on. No part of the Fed\u2019s job until now has been easy, and the central bank had to scramble to get inflation down from 40-year highs last year. But price increases are still abnormally high, and getting them down to sustainable levels may require a level of pain that has so far been avoided.<\/p>\n
\u201cWe\u2019ve seen inflation come down. That\u2019s the good news,\u201d said Douglas Holtz-Eakin, former head of the Congressional Budget Office and the president of the conservative American Action Forum. \u201cThe bad news is there\u2019s a lot of work left. There are parts of the economy, like the goods sector, where [the Fed] can think \u2018we\u2019ve done our job.\u2019 The Fed can\u2019t do that. They\u2019re going to have to keep going.\u201d<\/p>\n
The markets were muted for much of the day, but the Dow Jones industrial average closed down 156.6 points, or 0.46 percent. The S&P 500 was essentially flat, falling 0.03 percent, and the Nasdaq rose 0.57 percent.<\/p>\n
Housing costs were by far the largest contributor, accounting for nearly half of the monthly increase. Fed officials and economists expect rent inflation eventually to fall as costs for new leases cool off. But that has not happened on a significant scale yet. Rent in January was up 0.7 percent over the month in comparison with 0.8 percent in the previous report. It was also up 8.6 percent from the year before.<\/p>\n
Categories including food, gasoline and natural gas also drove average prices higher. The food index in January rose 0.5 percent over December\u2019s. Four of the six major grocery store categories increased over the month. Eggs, in particular, rose 8.5 percent in January, driven by shortages caused by the avian flu.<\/p>\n
The energy index rose 2 percent over December, and the gasoline index increased 2.4 percent. Motor vehicle insurance also was up, along with the cost of clothing, household furnishings and recreation. New-car prices were up 0.2 percent.<\/p>\n
There were a few bright notes: The cost of medical care fell 0.4 percent in January. Used cars and trucks also fell, by 1.9 percent, continuing a downward trend. Airfares fell 2.1 percent.<\/p>\n
In a statement, President Biden said the seven-month streak in easing inflation was \u201cdelivering welcome breathing room for American families.\u201d But even with a growing job market and other sources of economic strength, \u201cthere is still more work to do as we make this transition to more steady, stable growth, and there could be setbacks along the way,” he said.<\/p>\n
The past few months have bolstered confidence that encouraging inflation reports last fall really did represent the start of a trend and that the economy doesn\u2019t appear to be barreling toward a recession \u2014 yet. The labor market in particular continues to show remarkable strength, with employers adding 517,000 jobs in January and the unemployment rate falling to 3.4 percent, a low not seen since May 1969.<\/p>\n
But the Fed keeps repeating that its raising of interest rates to slow the economy is far from over, and there is much that could thwart its future efforts. A top concern is that the remaining sources of inflation \u2014 many of which are tied to the hot labor market and rising wages \u2014 will be difficult to tame. Last week, survey results from the University of Michigan also showed that consumers\u2019 inflation expectations over the coming year increased, even if they\u2019re feeling better about the economy as a whole.<\/p>\n
In a Tuesday speech, Dallas Fed President Lorie Logan said that while there has been some progress on inflation, the question for monetary policy is \u201cwhether the progress will continue.\u201d Supply chains can\u2019t recover twice. It will take time for the slowing housing market to show up in rent costs. And services are showing few signs of improvement at all.<\/p>\n
\u201cBroad-based and persistent services inflation is not the result of special circumstances like supply-chain disruptions that will eventually go away,” Logan said. \u201cRather, I see it as a symptom of an overheated economy, particularly a tight labor market, which will have to be brought into better balance for the overall inflation rate to return sustainably to 2 percent.\u201d<\/p>\n
Women lost more jobs early in the pandemic. They\u2019re also returning faster.
\nThe Fed has raised rates eight straight times in less than a year, most recently by a quarter of a percentage point, a slower pace than in nearly all of 2022. Fed leaders are planning for a few more increases of that scale, and then they\u2019ll hold for a while and let high the higher rates take hold. The Fed\u2019s base policy rate, known as the federal funds rate, sits between 4.5 and 4.75 percent, a level that is steep enough to slow the economy. The expectation is that rates will go past 5 percent and that officials won\u2019t announce rate cuts until 2024, unless inflation comes down much faster than expected.<\/p>\n
\u201cThe moral of the story is that inflation is not cooling as rapidly as the Fed would like, especially core inflation,\u201d said Diane Swonk, the chief economist at KPMG, referring to a narrower inflation measure that strips out more-volatile sectors. \u201cAnd that is something that is just going to affirm their commitment to continue raising rates at least two times.\u201d<\/p>\n
But only time and data will tell. So far, progress on inflation has largely come from improved supply chains, falling gas and energy prices, a cooling housing market and easing prices for consumer goods. Now the Fed is more focused on a narrow measure of inflation that looks at certain services, including education, medical care and hospitality, where wage pressures and labor shortages can keep pushing prices up.<\/p>\n
In remarks at the Economic Club of Washington, D.C., last week, Federal Reserve Board Chair Jerome H. Powell said the lengthy process of getting inflation down is probably \u201cnot going to be smooth. It\u2019s probably going to be bumpy.\u201d He said that that expectation was confirmed by the unexpectedly hot January jobs report and that if the economic data \u201ccontinued\u201d to come in stronger than expected, \u201cwe would certainly raise rates more\u201d than officials anticipate now.<\/p>\n
Fed hikes rates by 0.25 percentage points, with inflation easing
\nPowell said goods prices are moving in the right direction, and housing costs should improve over the course of the year as rents on new leases stabilize. But there has been no progress in many services sectors that are key to reducing overall inflation.<\/p>\n
\u201cThat\u2019s going to take some time,\u201d Powell said last week. \u201cWe need to be patient. We think we\u2019re going to need to keep rates at a restrictive level for a period of time before that comes down.\u201d<\/p>\n
Interest rates work with a lag, and it will be months before the scope of last year\u2019s large increases are felt. That could mean that pain for the labor market, or a significant drop in consumer spending, is still ahead. But for now, those key pillars of the economy remain intact: Mastercard is estimating that U.S. retail sales, apart from cars, rose 8.8 percent in January from a year earlier. And Goldman Sachs cut the probability that the U.S. economy will enter a recession in the next 12 months to 25 percent, down from 35 percent.<\/p>\n
Sales have stayed strong at Forty Winks, a lingerie store in Cambridge, Mass. The small business had a busy start to the year and, on top of regular sales in January and over the summer, decided to add a pre-Valentine\u2019s Day sale last week featuring 20 percent discounts in its physical stores and online, plus an in-store party with cookies and champagne. It was a hit.<\/p>\n
Co-owner Rachel Wentworth said that there has been a big response to sales but that overall, she hasn\u2019t felt a pullback at her nearly 13-year-old store. If anything, she\u2019s looking to hire for some behind-the-scenes roles off the showroom floor to help the business grow.<\/p>\n
\u201cI always get nervous thinking, \u2018Oh my god, we have to tighten our belts,\u2019\u201d Wentworth said. \u201cBut it doesn\u2019t seem to translate to our business. I know it does translate to other businesses. But our numbers are really good.\u201d<\/p>\n
<\/p>\n","protected":false},"excerpt":{"rendered":"
Inflation eased for a seventh month straight in January, but interest rates will keep rising as the Fed works harder to root stubbornly high prices out of the economy. Data released by the Bureau of Labor Statistics on Tuesday morning showed prices rose 6.4 percent in January compared to the year before. That marked a […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[3684,3696,3712,3699,3700,3692,3713],"tags":[],"class_list":["post-28611","post","type-post","status-publish","format-standard","hentry","category-blog","category-business","category-employment","category-finance","category-financial","category-news","category-united-states"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack-related-posts":[],"_links":{"self":[{"href":"https:\/\/blog.beanybux.com\/wp-json\/wp\/v2\/posts\/28611","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blog.beanybux.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.beanybux.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.beanybux.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.beanybux.com\/wp-json\/wp\/v2\/comments?post=28611"}],"version-history":[{"count":0,"href":"https:\/\/blog.beanybux.com\/wp-json\/wp\/v2\/posts\/28611\/revisions"}],"wp:attachment":[{"href":"https:\/\/blog.beanybux.com\/wp-json\/wp\/v2\/media?parent=28611"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.beanybux.com\/wp-json\/wp\/v2\/categories?post=28611"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.beanybux.com\/wp-json\/wp\/v2\/tags?post=28611"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}