Inflation fell three-tenths of a percentage point to 3.1% for the year ending in January, the Bureau of Labor Statistics reported Tuesday, a sign that price pressures are abating, but still a higher reading than anticipated.
Economists had anticipated that inflation would cool to 2.9%, so Tuesday’s report showed less improvement than officials at the Federal Reserve had hoped for as they consider when to begin easing monetary policy. Of even greater concern, “core inflation,” which excludes volatile food and energy prices, held steady at 3.9%.
On a month-to-month basis, inflation rose 0.3%. Core inflation rose 0.4%.
Overall, the drop in headline year-over-year inflation will be helpful for President Joe Biden, whose White House has been touting any declines in inflation, alongside the stable labor market, as “Bidenomics” in action.
But the hotter-than-expected reading means the Fed’s pivot to cutting its interest rate target might be further delayed.
Dan North, a senior economist with Allianz Trade Americas, told the Washington Examiner after the report was released that the report will likely be seen as a sign that the Fed will hold off on lowering rates.
“Inflation is not a straight line down. We’re a long way from 2%, and the economy is doing just fine. I’m not cutting anytime soon,” North said, channeling Fed Chairman Jerome Powell.
Annual inflation peaked at about 9% in June 2022. It’s now much lower, but price growth is still running higher than the Fed’s 2% target.
Inflation has been blamed on factors on both the supply and demand sides of the equation. Republicans have blamed it on the rash of stimulus spending amid the pandemic coupled with ultralow interest rates. Democrats, meanwhile, have highlighted supply-chain problems and noted that inflation has increased in most Western countries and not just the United States.
There has recently been a renewed sense of hope that the Fed will be able to pull off a “soft landing,” a scenario in which inflation falls back to a healthy level while the broader economy avoids a recession.
While the central bank’s monetary policy committee is predicting three rate cuts this year, investors are betting that officials will go even further, according to the CME Group’s FedWatch tool.
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The labor market has also given the Fed some wiggle room in its quest to vanquish inflation.
The economy once again crushed expectations in January and added 353,000 more jobs, the Bureau of Labor Statistics found, starting the new year off to a strong start. The unemployment rate remained at 3.7%.
