Annual inflation slowed to 6.4% in January, the Bureau of Labor Statistics reported Tuesday, a sign that the price pressures that have torn through the economy are easing.
The much-anticipated numbers from the consumer price index show that, while inflation is much too high, it is cooling some in response to the Federal Reserve’s aggressive interest rate hikes. Inflation had been running at 6.5% the month before. Tuesday’s report marks six straight months of declines in annual inflation after the rate peaked at a whopping 9.1% in June.
However, the headline number was higher than what most economists had expected and will undoubtedly raise concerns about a recession.
Meanwhile, “core inflation,” which strips out volatile food and energy prices, fell by a tenth of a percentage point to 5.6% in the year ending in January.
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The January CPI report was shaped in part by methodological changes, including updated seasonal adjustments. It also included new weights for 2023, which were expected to add somewhat to measured inflation, according to a note by Goldman Sachs researchers prior to the Tuesday morning release.
Prices overall grew by a half-point between December and January (as opposed to an annual basis), according to the index, the most in several months.
“A little higher than expected,” Brian Marks, the executive director of the University of New Haven’s Entrepreneurship and Innovation Program, told the Washington Examiner following the report’s release. “But at the end of the day, with wages being higher … I fully expect the Fed to continue on the path that they have more work to do, given their targets.”
The main tool the central bank has to control inflation is increasing its interest rate target, which it has jacked up over the past year to dampen demand in hopes of driving down inflation.
After four consecutive meetings of historic three-quarter-point rate hikes, the Fed down-throttled a bit during its December meeting and opted for a half-point hike and then announced an even milder quarter-point hike this month.
The normal effect of raising rates is that the economy and, ultimately, the labor market will slow down. Despite the huge (and rapid) increase in interest rates, the economy has proven surprisingly resilient.
The higher prices are hitting consumers hard. The rising cost of food, in particular, has been difficult for many households. The price of chicken has risen 10.5% over the last year while dairy products have increased by 14%.
Meanwhile, energy prices have risen by nearly 9% in the past year, and people in many places, especially in cold New England, shelled out major money for heating their homes this winter.
The economy notched another 517,000 jobs in January, the Bureau of Labor Statistics reported — a very strong performance that shows commerce is holding up despite the headwinds. The unemployment rate fell to 3.4%, the lowest rate since 1969.
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Fed officials have said the labor market needs to take a bit of a hit for inflation to be restrained, and Fed Chairman Jerome Powell has said that job openings “need” to come down.
The situation is a double-edged sword in that if the labor market doesn’t cool off and inflation remains stubborn, the Fed might have to continue jacking up rates to a higher-than-expected degree, which has the potential to knock the economy into a recession.
