Inflation Cooled Just Slightly, With Worrying Details

WASHINGTON — Inflation has slowed from its painful 2022 peak but remains uncomfortably rapid, data released Tuesday showed, and the forces pushing prices higher are proving stubborn in ways that could make it difficult to wrestle cost increases back to the Federal Reserve’s goal.

The Consumer Price Index climbed by 6.4 percent in January compared with a year earlier, faster than economists had forecast and only a slight slowdown from 6.5 percent in December. While the annual pace of increase has cooled from a peak of 9.1 percent in summer 2022, it remains more than three times as fast as was typical before the pandemic.

And prices continued to increase rapidly on a monthly basis as a broad array of goods and services, including apparel, groceries, hotel rooms and rent, became more expensive. That was true even after stripping out volatile food and fuel costs.

Taken as a whole, the data underlined that while the Federal Reserve has been receiving positive news that inflation is no longer accelerating relentlessly, it could be a long and bumpy road back to the 2 percent annual price gains that used to be normal. Prices for everyday purchases are still climbing at a pace that risks chipping away at economic security for many households.

“We’re certainly down from the peak of inflation pressures last year, but we’re lingering at an elevated rate,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives. “The road back to 2 percent is going to take some time.”

Stock prices sank in the hours after the report, and market expectations that the Fed will raise interest rates above 5 percent in the coming months increased slightly. Central bankers have already lifted borrowing costs from near zero a year ago to above 4.5 percent, a rapid-fire adjustment meant to slow consumer and business demand in a bid to wrestle price increases under control.

But the economy has so far held up in the face of the central bank’s campaign to slow it down. Growth did cool last year, with the rate-sensitive housing market pulling back and demand for big purchases like cars waning, but the job market has remained strong and wages are still climbing robustly.

That could help to keep the economy chugging along into 2023. Consumption overall had shown signs of slowing meaningfully, but it may be poised for a comeback. Economists expect retail sales data scheduled for release on Wednesday to show that spending climbed 2 percent in January after falling 1.1 percent in December, based on estimates in a Bloomberg survey.

Signs of continued economic momentum could combine with incoming price data to convince the Fed that it needs to do more to bring inflation fully under control, which could entail pushing rates higher than expected or leaving them elevated for longer. Central bankers have been warning that the process of wrangling cost increases might prove bumpy and difficult.

“There has been an expectation that it will go away quickly and painlessly — and I don’t think that’s at all guaranteed,” Jerome H. Powell, the Fed chair, said at an event last week. “The base case for me is that it will take some time, and we’ll have to do more rate increases, and then we’ll have to look around and see whether we’ve done enough.”

A broad range of products and services kept inflation elevated in January: Pricier hotels, car insurance and vehicle repairs all contributed to the increase in the overall index.

Some goods, including used cars and clothing for women, dropped in price on a monthly basis. Even so, the slowdown for some physical products was less pronounced than it had been. Price increases for overall apparel accelerated, for instance.

Moderating price increases for goods and commodities have driven the overall inflation slowdown in recent months. Fed officials have embraced the cool-down but have also warned that it may not continue, because it has come as pandemic disruptions faded and tangled supply chains unsnarled.

“Supply chains can’t recover twice,” Lorie Logan, the president of the Federal Reserve Bank of Dallas, said in a speech on Tuesday.

Pre-owned vehicles offer a good example of why the drag from falling prices for some goods may prove temporary. Used-car prices have been declining back to normal thanks to lagging demand and rebounding supply, and that has been helping to subtract from overall price increases. But used-car costs are already beginning to pick up again at a wholesale level, which suggests that the trend is unlikely to last indefinitely.

That is why central bankers and economists are closely watching what happens with prices for services, like health care and restaurant meals, pedicures and tax accounting.

Service prices may prove to be more closely tied to underlying momentum in the economy: Labor is a major cost for many service companies, so businesses are likely to charge more when unemployment is low and they have to increase pay to compete for workers.

So far, such inflation shows little sign of letting up. Service prices excluding energy continued to increase rapidly in January, owing in part to the jump in rental and other housing costs.

That rapid rent inflation is expected to abate in the months ahead as a recent pullback in asking rents on newly leased apartments gradually feeds into official inflation data. But how much — and for how long — increases in housing costs will fade is uncertain.

“It is a little bit unclear what the underlying momentum is in shelter,” said Sonia Meskin, head of U.S. macro at BNY Mellon Investment Management, explaining that strong job gains and solid wage growth could keep pressures on the market. “Shelter tends to correlate with a tight labor market.”

Hiring in America remains unusually strong, despite recent high-profile layoffs in the technology industry. Employers added more than half a million jobs in January, an unexpectedly robust number, and gains in average hourly earnings and other pay trackers remain rapid, though they have begun to slow.

The unsavory question confronting officials at the Fed is whether the labor market will need to weaken in order to wrestle inflation lower. Many central bankers have suggested that wage increases are probably too hot to be consistent with 2 percent inflation, their official target. Central bankers define their inflation goal using a related but more delayed inflation measure, the Personal Consumption Expenditures index.

“I don’t think they’re going to feel comfortable until the labor market turns a little more decisively,” said Michael Feroli, chief U.S. economist at J.P. Morgan.

While some policymakers have argued that the Fed should be careful not to constrain the labor market more than is necessary in its battle against inflation, that so-called dovish wing of the central bank’s policymaking set is poised to lose a key member. President Biden is going to make Lael Brainard, the Fed’s vice chair, the new head of his National Economic Council, according to people familiar with the matter.

Ms. Brainard has emphasized in recent speeches that the central bank may be able to wrestle inflation lower without slowing demand so much that it results in significant job losses. And she has focused on drivers of inflation outside of the labor market, including swollen corporate profits and aftershocks from high fuel prices.

But as she has emphasized those hopeful reasons that price increases might moderate, many other Fed officials have focused more keenly on the risk that services outside of housing will continue to climb at their current pace — keeping inflation too hot for comfort.

If that price measure “remained in its current range, while other categories returned to their prepandemic pace, total inflation going forward would settle much closer to 3 percent than to our 2 percent goal,” Ms. Logan from the Dallas Fed warned on Tuesday. She explained services inflation “as a symptom of an overheated economy, particularly a tight labor market.”

John C. Williams, president of the Federal Reserve Bank of New York, said on Tuesday that controlling inflation “will likely entail a period of subdued growth and some softening of labor market conditions.”

For now, a mounting body of evidence suggests that inflation is not fading as quickly as economists and central bankers had hoped even a month or two ago, said Jason Furman, an economist at Harvard who was an Obama administration economic adviser.

“It turns out that a lot of that was probably a false dawn,” Mr. Furman said. “The whole perspective we have on inflation is much worse.”

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