Inflation Heated Up in January, Freezing the Fed Consumer prices rose 3%, as fight against inflation continues to face headwinds
The Labor Department said Wednesday that prices rose last month 0.5% from December on a seasonally adjusted basis. That was the largest monthly increase since August 2023 and well ahead of economists’ expectations for a milder increase of 0.3%.
The gain pushed 12-month inflation to 3% in January. That marked a pickup from December, when prices rose 2.9%. (…)
Core prices, which strip out volatile food and energy prices, rose 0.4% from December on a seasonally adjusted basis, the largest increase in nearly two years. Core inflation was 3.3% over the year. (…)
Wednesday’s report was particularly discouraging because housing and rental costs, which have been moderating and are expected to continue to ease, weren’t the culprit. Instead, the latest report pointed to inflationary pressures across other goods and services that had seen a slowdown in price pressures recently. (…)
The Fed measures progress against its 2% target using a separate inflation gauge that stood at 2.6% in December. “We are close, but not there on inflation…. So we want to keep policy restrictive for now,” said Fed Chair Jerome Powell at a congressional hearing on Wednesday morning, after the release of the latest inflation report. (…)
Many companies tend to reset their prices in January, to reflect rising costs from the previous year. The turn-of-the-year bump has been especially large in each of the past three years following the outbreak of inflation in 2021. (…)
In a speech last week, Dallas Fed President Lorie Logan said another such turn-of-the-year jump in prices “will be a signal that monetary policy has more work to do.”
(…) Excluding food and energy, price growth also beat expectations with a 0.4% gain in January. Gains were broad-based among major components. Core goods prices were up 0.3% over the month and roughly flat over the past year as the disinflationary tailwinds from improved supply chains have run their course. (…)
On the services side, core prices rose 0.5%. The closely-watched shelter component rose 0.4% over the month, with both rent of primary residences and owners’ equivalent rents rising 0.3%, in line with their six-month averages. Lodging away from home, however, helped lift the shelter component with a +1.4% rise over the month, which we see as partially tied to the L.A. wildfires given higher-than-usual occupancy in the area during the month. Beyond shelter, outsized gains in motor vehicle insurance (+2.0%), airline fares (+1.2) and recreation services helped drive core services higher.
January’s unexpected strength echoes the pop in prices registered at the start of 2024 and renews questions over residual seasonality (i.e., the inability of seasonal factors to fully capture regular calendar patterns) in the data. However, looking at the year-over-year data to remove issues around seasonality also points to inflation’s ongoing strength.
CPI inflation surprised just about everybody. With expensive eggs in their face, the blame went to the “January effect” and the inability of the BLS to properly seasonally adjust the data. This in spite of the fact that “In accordance with annual practice, relative importance values have been updated, and seasonal adjustment factors were recalculated to reflect price movements from the just-completed calendar year.”
In January 2024, core CPI rose 0.37% after 0.27% in December 2023. But February and March were also up 0.37% and 0.38% respectively. In January 2023, core CPI rose 0.41% after +0.37% in December. Yet, February, March and April rose 0.42% on average. January effects, if they existed, would see inflation slowing in subsequent months.
The facts are that
- core CPI has been up 0.3%/month on average since August 2024. Six months is close to a trend, no? That’s a steady 3.7% annualized.
- CPI durable goods has stopped declining last September and has been rising 0.2%/m since, including +0.37% in January. That’s 2.4% annualized.
- CPI services was up 0.5% in January, faster than its 0.35% average in the last 9 months on 2024. That’s 4.3% annualized.
- CPI rent rose 0.32% in January, close to its 6-m average of 0.35%, that’s 4.3% annualized.
- CPI services less rent was +0.5% after +0.3% in December and +0.2% in November. That’s Mr. Powell’s supercore cpi…
It so happens that the Atlanta Fed’s Wage Growth Tracker, released yesterday, shows the 3-m m.a. at 4.1% YoY with “job stayers” stabilized at 4.1% and “switchers” at 4.2%. That’s in line with last week’s employment report showing wages stabilizing at 4.0% since April 2024.
It also happens that there’s a bit of a correlation between wages and service prices which have yet to catch up with wages since the pandemic.
The road to 2% will be long and arduous…
This is from the WSJ Editorial Board:
Trumponomics and Rising Inflation
Does President Trump understand money? Not money as in cash, but the supply of money, the price of money as measured by interest rates, and their impact on inflation? The answer would appear to be no after Mr. Trump called for lower interest rates on Wednesday—the same day the Labor Department reported an increase in inflation for the third straight month.
“Interest Rates should be lowered, something which would go hand in hand with upcoming Tariffs!!!” Mr. Trump posted on his social-media site. The layers of intellectual confusion here are hard to parse, especially since higher tariffs will mean higher prices on the affected goods. But perhaps the President wants the public to look elsewhere when assigning blame for rising prices.
Yet if he’s trying to blame the Federal Reserve, which controls short-term interest rates, he has the analysis backward. (…)
The last thing Mr. Trump should be doing now is demanding that Mr. Powell cut rates further and faster—unless the President wants inflation to resume its Biden-era climb. (…)
As Buyers Fail to Show Up, More Homes Are Being Pulled From Sale An increase in the number of properties being delisted could be an early sign of a weakening housing market
Nearly 73,000 homes were pulled from sale after they failed to find a buyer in the final month of last year, data from real-estate analytics firm CoreLogic show.
Delistings tend to spike in winter when fewer people are actively looking for a home. But the trend last December was unusually strong, representing almost one in 10 properties on the market, and a 64% increase from the same month of 2023.
Most sellers are pulling their homes only temporarily and think they will have a stronger hand if they relist in spring. But the jump in delistings indicates that much of the extra inventory that hit the housing market throughout 2024 sat unsold, so had to be pulled in higher numbers come winter. It also suggests there is a bit more pent-up desire to sell than headline inventory figures would indicate.
The story of the U.S. housing market over the past few years has been that homeowners with cheap mortgages have stayed put as they don’t want to give up their ultralow rates: Around two-thirds of borrowers are paying a mortgage rate less than 4%. This has strangled supply and pushed U.S. home values to record highs.
But the lock-in effect is slowly fading as more people need to move for a job, to accommodate a growing family or some other life event that can’t be delayed indefinitely. In December, 1.15 million homes were for sale in the U.S., a 16% increase from the same month of 2023, data from the National Association of Realtors show.
Still, despite more properties being available, buyers were thin on the ground. Home sales in 2024 were at their lowest level in nearly 30 years.
Home values have held up despite this weak demand, at least so far. Homeowners don’t like to sell for less than their neighbors received and aren’t ready to adjust their expectations yet. Delistings are probably acting as a safety valve, allowing sellers to delay rather than accept a lower offer. (…)
It may turn out that December was an unusually weak month for the housing market. The rate on a 30-year, fixed-rate mortgage crept back toward 7% at the end of 2024, damping demand. Some buyers may hold off until it is clearer where the economy is heading under a second Trump administration.
But if delistings and unsold house-builder inventory remain high over the coming months, it will be a bad sign for sellers. (…)
The rise in delistings also means there could be a shadow inventory of homes waiting to come onto the market as soon as volumes pick up. That may put prices under pressure, even if buyers come out this spring.
Zillow:
Persistently high mortgage rates are having a bigger impact on buyers than on sellers as the home shopping season approaches. Though competition varies greatly by region, most buyers in the market today have a good chance of seeing a price cut on their saved listing. Nearly 23% of listings received a price cut in January, a record high in Zillow data for this time of year.
Rate lock’s hold appears to be losing its grip as homeowners find themselves in a solid financial position and ready to move on — even if it means taking a price cut on their listing. Home equity is near record highs and the general economy and financial markets are surprisingly strong. Zillow surveys of recent sellers show 78% were influenced by life events to make their decision to sell, such as landing a new job or a change in family size.
Buyers, on the other hand, are feeling the sting of mortgage rates that ticked up to 7.04% in January. That’s the highest level since May, and significantly higher than the mid-6% rates seen in January last year. Rates gave buyers facing affordability challenges stronger headwinds in closing the deal – newly pending sales fell 3.6% year over year.