Inflation cools further in January.
Year-over-year inflation eased to 2.4% in January, its slowest pace since
Last, according to the US Bureau of Labor Statistics.
Consumer prices rose 0.2% on the month. Core inflation, which excludes the volatile food and energy categories, rose 0.3% in January and is up 2.5% over the past twelve months.
The easing of shelter cost inflation has been the biggest factor behind receding inflationary pressures over the past year. Shelter costs in January were 3% higher than a year earlier, compared with 4.3% a year earlier. While they still made the biggest contribution of a single major sector to January inflation, a broad category of all other non-energy services was a much more important factor, driven by, among other things, a surge in airline fares, recreation, some medical costs, and personal services.
Non-energy goods prices fell in January after a half-year of significant gains, likely related to tariff impacts. Whether there is more upward pressure as companies are forced to pass along tariff costs to consumers remains to be seen. About 90% of tariff costs have been borne by the US, rather than foreign firms. But many US companies have tried to “eat” the tariff costs rather than pass them along to their consumers. That is becoming increasingly difficult.
Information relevant to monetary policymaking remains delayed. We are still waiting on December data for the broad personal consumption expenditure (PCE) index favored by the Federal Reserve. That will come out next Friday. That index gives far greater weight to health care costs (including costs incurred by the government and businesses on behalf of consumers) and much less weight to shelter costs. Because the latter are up more than the former, we may not see as much improvement in PCE measures of inflation.
It is essential to note that easing inflation, while good news, does not set the stage for actual declines in the levels of prices. Overall consumer prices today are up more than a quarter from their pre-pandemic levels, and food costs are up 30%. So households will continue to feel the impact of high prices until incomes rise enough to help offset this.
Some of the improvements came from volatile categories. Energy fell 1.5% in January, weighed down by a 3.2% drop in gasoline prices. But used car prices declined 1.8%. Motor vehicle insurance fell 0.4% in the month, bringing its annual inflation rate to the lowest level since March 2021.
For many households, though, this is still a challenging environment dogged by affordability challenges. Lower gas prices provide relief, but they do not undo years of cumulative price increases. The essentials households can't cut out, and continue to rise.
1) Food at home (a good gauge for grocery costs): up 2.2% from a year ago
2) Food overall: up 2.9%
3) Energy services: up 6.6% during peak winter heating season
4) Piped gas service: up 9.8% from a year ago, after a 1% increase in January alone
There are early signs that tariff pressures are filtering through goods categories. Video and audio products are up 3.7% from a year ago, the largest increase on record. Computers and smart home assistants have risen 3.1%. Footwear is up 2%, the biggest gain since late 2022. Household furnishings and supplies are up 3.8%.
We also might not be able to fully exhale. Shelter rose 0.2% in the month and 3% over the past year, accounting for 45% of the annual increase in inflation. There could still be methodological quirks tied to last year’s government shutdown weighing on that data.
But what I can't stop thinking about today is: “Be careful what you wish for." If the economy stabilizes — as this week's January jobs report suggests — firms may find it easier to pass along higher tariff-related costs in the months ahead. But if growth softens and companies can’t push through price increases, those costs may show up elsewhere, with companies hiring fewer workers or offering smaller raises.
That highlights the tricky situation Fed officials find themselves in right now. Policymakers remain on the sidelines after cutting rates 175 basis points since September 2024. A pick-up in hiring last month gives them cover to wait, and they want to see whether price pressures are indeed cooling.
For many households, though, this is still a challenging environment dogged by affordability challenges. Lower gas prices provide relief, but they do not undo years of cumulative price increases. The essentials households can't cut out, and continue to rise.
1) Food at home (a good gauge for grocery costs): up 2.2% from a year ago
2) Food overall: up 2.9%
3) Energy services: up 6.6% during peak winter heating season
4) Piped gas service: up 9.8% from a year ago, after a 1% increase in January alone
There are early signs that tariff pressures are filtering through goods categories. Video and audio products are up 3.7% from a year ago, the largest increase on record. Computers and smart home assistants have risen 3.1%. Footwear is up 2%, the biggest gain since late 2022. Household furnishings and supplies are up 3.8%.
We also might not be able to fully exhale. Shelter rose 0.2% in the month and 3% over the past year, accounting for 45% of the annual increase in inflation. There could still be methodological quirks tied to last year’s government shutdown weighing on that data.
But what I can't stop thinking about today is: “Be careful what you wish for." If the economy stabilizes — as this week's January jobs report suggests — firms may find it easier to pass along higher tariff-related costs in the months ahead. But if growth softens and companies can’t push through price increases, those costs may show up elsewhere, with companies hiring fewer workers or offering smaller raises.
That highlights the tricky situation Fed officials find themselves in right now. Policymakers remain on the sidelines after cutting rates 175 basis points since September 2024. A pick-up in hiring last month gives them cover to wait, and they want to see whether price pressures are indeed cooling.