The Federal Reserve's preferred inflation index climbed in January, which is the most recent indication that the U.S. consumer price increase deceleration is happening unevenly month to month.
(Photo : by OLIVIER DOULIERY/AFP via Getty Images)The Federal Reserve's preferred inflation index climbed in January, which is the most recent indication that the U.S. consumer price increase deceleration is happening unevenly month to month.
On Thursday, the government said that prices increased by 0.3% in January compared to 0.1% in December. A more positive indication, however, is that prices were up just 2.4% from a year ago; this is a decrease from December's 2.6% annual pace of growth, which was the lowest in over three years.
As President Joe Biden runs for reelection, the White House will undoubtedly applaud the year-over-year decline in inflation. Nevertheless, many Americans are still annoyed that total costs are still far higher than they were when inflation broke out three years ago, despite the fact that average earnings have exceeded inflation over the last year. This attitude, which is reflected in a number of polls, may be detrimental to Biden's chances of winning reelection.
The Fed officials were "very much justified to be cautious," according to the statistics released on Thursday, according to Omair Sharif, the head of the consultancy firm Inflation Insights. "They still wish to gain greater self-assurance."
With volatile food and energy costs excluded, so-called "core" prices increased by 0.4% in January compared to 0.1% in December. This was the largest increase in a year. Additionally, core prices increased 2.8% over the previous year-barely down from December's 2.9% increase. Core prices are viewed by economists as a more accurate indicator of the likely course of future inflation.
Nevertheless, three months of extremely low core inflation figures were followed by January's spike. Additionally, core prices increased at a mere 1.9% annual pace in the second half of last year.
The Fed has signaled that it will probably drop its benchmark interest rate many times this year and has welcomed the long-term decrease in inflation. The majority of economists predict that the first cut will happen in May or June.
Consumer Backlash, Fed's Measures, and Future Outlook
The increased consumer backlash against persistently high costs, especially for packaged foods, autos, and other tangible items, is one trend that is assisting in curbing price hikes. In the last month, CEOs from a number of businesses, including PepsiCo, McDonald's, and General Mills, have stated that their organizations are reducing price increases for their products to pre-pandemic levels after more drastic price rises had led to reduced sales volumes.
According to the Fed's favored indicator, inflation peaked in the summer of 2022 at 7.1% and then started to decline last year. A consistent stream of job seekers has made it simpler for companies to restrain pay rises, one of the drivers of inflation, while supply chain bottlenecks have alleviated, lowering the costs of parts and raw materials. Nevertheless, inflation is still higher than the central bank's yearly goal of 2%.
In an effort to combat the greatest wave of inflation in forty years, the Fed hiked its target rate eleven times starting in March 2022. The rate increases have significantly reduced inflation. However, they've also significantly increased the cost of borrowing for both individuals and companies. Specifically, the critical homebuying sector of the economy has seen a deceleration in sales due to rising lending rates. On the other hand, once the Fed decides to decrease rates, cheaper borrowing costs would ultimately trickle down to the whole economy.
The increase in inflation from December to January was mostly caused by increasing prices for services like lodging, medical care, and dining out. For instance, hospital services are become more expensive to compensate for rising labor expenses for highly sought-after healthcare professionals like nurses. In other service-related businesses, the similar pattern is also noticeable. This explains why prices for commodities have decreased as corporate inventories have been renewed, while inflation for services has proven more persistent.
Many Fed members have expressed optimism that inflation will continue to decline and return to the Fed's target level, while downplaying the recent price increase as a one-time event.
