Consumer Prices Rose More Than Expected in January

Consumer prices rose more than expected in January, led by rising energy and shelter costs, signaling that the Federal Reserve may have to be more aggressive in raising interest rates to tame inflation.

The Consumer Price Index (CPI) rose 0.5% in January, faster than projections of 0.4% and accelerating sharply from 0.1% in December, the Bureau of Labor Statistics (BLS) reported Tuesday. On an annual basis, the index was up 6.4%, decelerating slightly from 6.5% in December but exceeding estimates of 6.2%. Still, it was the smallest year-over-year increase since October 2021.

Core prices, which exclude volatile food and energy categories, rose 0.4% from the previous month, matching December’s pace. On an annual basis, they were up 5.6%, slowing marginally from 5.7% in December. This marks the slowest annual gain since December of 2021.

Inflation by Sector

Energy prices rose 2.0% last month, rebounding from consecutive declines in November and December. Within the sector, gasoline costs rose 2.4%, while those for natural gas increased 6.7%. On an annual basis, the energy index was up 8.7%. This compares to a peak gain of 41% in June of last year, when energy prices peaked.

The food index rose 0.5%, accelerating slightly from 0.4% in December. Year-over-year, prices were up 10.1%, decelerating from 10.4% in December and compared with a peak gain of 11.4% in August. The food at home index, which includes groceries and other consumer staples, rose 11.3% from a year earlier. The food away from home index, which tracks prices at restaurants and outdoor dining establishments, rose 8.2%.

Shelter costs were among the biggest contributors to the overall index, rising 0.7% from the prior month. Year-over-year, they were up 7.9%. Within that category, costs for transportation services increased 0.9%, and were up 14.6% from January of 2022.

Implications for Monetary Policy

The hotter-than-expected inflation reading could prompt Fed policymakers to consider a more aggressive monetary policy stance. Markets are anticipating two additional rate hikes of 25 basis points each at the March and May meetings of the Federal Open Market Committee (FOMC), according to fed funds futures published by the CME Group. That would result in a terminal fed funds rate between 5% and 5.25%.