Hotter than expected CPI to start the year.
The overall Consumer Price Index (CPI) for January rose by a stronger than expected 0.5 percent (0.3 percent expected), while the core CPI (removing the volatile food and energy components) increased by 0.4 percent (0.3 percent expected). This pushed the 12-month trend rate up to 3.0 percent for the overall CPI and by 3.3 percent for the core. Note that the January CPI reading tends to be stronger than expected in most years. No tariff impacts were reflected in these figures.
While this is only one month’s worth of data and these figures are often volatile, today’s CPI report supports that view that inflation improvements have stalled (albeit at levels well below the peak). The Federal Reserve concentrates on the broader price index for personal consumption expenditures (PCE) rather than the CPI, but these inflation measures tend to move similarly – and the PCE inflation figures also remain above the Fed’s 2.0 percent long-term goal and have slowed (or stopped) their downward moves as well. Today’s inflation figures reduce the already low chances of the Fed easing at the next FOMC meeting in March. As Chair Powell noted his Congressional testimony, the Fed can afford to wait to ease monetary further until trend inflation moves lower again (or the economy appears to be slowing dangerously). And while Powell correctly refused to answer questions about tariffs, it is clear that they tend to move inflation higher. Perhaps not by a lot if the dollar moves higher and the tariff increases are modest, but the upward direction is clear, and the Fed will be cautious about easing policy until the breadth and magnitude of potential tariffs are more clear. It is unlikely that the Fed will ease policy in the first half of the year, and the odds of any Fed easing this year have declined (subject to the behavior of the job market and inflation later this year).
David W. Berson, Ph.D.
Chief US Economist
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