WASHINGTON— Consumer inflation in the United States cooled last month yet remained elevated in the latest sign that the pandemic-fueled price surge is only gradually and fitfully coming under control.
Tuesday’s report from the Labor Department showed that the consumer price index rose 0.3% from December to January, up from a 0.2% increase the previous month. Compared with a year ago, prices are up 3.1%.
That is less than the 3.4% figure in December and far below the 9.1% inflation peak in mid-2022. But the latest reading is still well above the Federal Reserve’s 2% target level at a time when public frustration with inflation has become a pivotal issue in President Joe Biden’s bid for re-election.
Excluding volatile food and energy costs, so-called core prices climbed 0.4% last month, up from 0.3% in December. On a year-over-year basis, core prices were up 3.9% in January, the same as in December. Core inflation is watched especially closely because it typically provides a better read of where inflation is likely headed.
Tuesday’s report showed that the drivers of inflation have decisively shifted from goods, like used cars, gasoline and groceries, which are now falling in price or rising much more slowly, to services, including hotel rooms, restaurant meals and medical care. That shift could raise concerns for the Fed, because services inflation typically takes longer to cool.
At his most recent news conference, Fed Chair Jerome Powell singled out persistently high services prices as a concern and indicated the central bank’s policymakers would like to see services inflation ease further before starting to cut their key interest rate.
“There’s still some inflation in the system that’s going to take some time to work through,” said Omair Sharif, founder of Inflation Insights, a research firm. “This justifies the Fed wanting to wait and see how things are going to go.”
Tuesday’s unexpectedly sticky inflation data sent stock and bond prices tumbling, with financial markets now envisioning the Fed’s first cut rates in June, rather than in May or March as many traders had previously expected. The S&P 500 was off nearly 1.2% in early afternoon trading, and the yield on the 10-year Treasury note jumped by a sharp one-tenth, to 4.28%.
Biden administration officials responded to Tuesday’s report by noting that average hourly pay, adjusted for inflation, rose in January and is 1.4% higher than it was a year earlier. But the average work week has declined because some businesses have reduced their employees’ hours, leaving weekly inflation-adjusted pay slightly lower than it was a year earlier.
“We understand there’s more work to be done, but this is an economy that is in a much different place than it was a year ago,” said Karine Jean-Pierre, the White House press secretary. “When you see eggs and milk and products like that at the grocery store going down, they’re lower than they were a year ago, that’s important.”
A raft of forward-looking data, in fact, suggests that inflation will continue to cool. The pace of wage growth has slowed, which reduces the pressure on companies to raise prices to offset higher labor costs. And consumers and business owners collectively expect lower inflation in the coming months and years, surveys show, a trend that can itself hold down price increases.
From December to January, average national gas prices tumbled 3.3%, the government said. Yet so far this month, the average price has climbed higher, rising 15 cents to $3.23 a gallon as of Tuesday, according to AAA.
Grocery prices rose 0.4% from December to January, the biggest such rise in a year, though compared with 12 months earlier, food prices are up just 1.2%.
But the costs of services — including auto insurance, apartment rents, and concert tickets — are still rising faster than they did before the pandemic and keeping overall inflation persistently high. The cost of car insurance has soared more than 20%, on average, compared with a year ago.
Such price spikes are causing heartburn for many consumers. Bill Milligan of Atlanta said he was stunned last month to find that the cost of insuring one of his cars had soared nearly 30% compared to six months earlier.
