Key U.S. inflation measure surges at fastest rate since June
The Federal Reserve’s preferred inflation gauge rose last month at its fastest pace since June, an alarming sign that price pressures remain entrenched in the U.S. economy and could lead the Fed to keep raising interest rates well into this year.
Friday’s report from the Commerce Department showed that consumer prices rose 0.6% from December to January, up sharply from a 0.2% increase from November to December. On a year-over-year basis, prices rose 5.4%, up from a 5.3% annual increase in December.
Excluding volatile food and energy costs, so-called core prices rose 0.6% from December, up from a 0.4% rise the previous month. And compared with a year earlier, core inflation was 4.7% in January, versus 4.6% in December.
The report also showed that consumer spending rose 1.8% last month from December after falling the previous month.
America’s consumers rebounded last month from a weak holiday shopping season by boosting their spending at stores and restaurants at the fastest pace in almost two years.
January’s price data exceeded forecasters’ expectations, confounding hopes that inflation was steadily decelerating and that the Fed could relent on its campaign of rate hikes. It follows other recent data that also suggested that the economy remains gripped by inflation despite the Fed’s strenuous efforts to tame it.
Last week, the government issued a separate inflation measure — the consumer price index — which showed that prices surged 0.5% from December to January, much more than the previous month’s 0.1% rise. Measured year over year, consumer prices climbed 6.4% in January. That was well below a recent peak of 9.1% in June but still far above the Fed’s 2% inflation target.
Since March of last year, the Fed has attacked inflation by raising its key interest rate eight times. Yet despite the resulting higher borrowing costs for individuals and businesses, the job market remains surprisingly robust. That is actually a worrisome sign for the Fed because strong demand for workers tends to fuel wage growth and overall inflation. Employers added a sizzling 517,000 jobs in January, and the unemployment rate fell to 3.4%, its lowest point since 1969.
“Reaccelerating price pressures, coupled with a still-strong labor market that is restoring incomes and is supporting demand, will keep the Fed on track to hike rates further over coming meetings,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.
The Fed is thought to monitor the inflation gauge that was issued Friday — the personal consumption expenditures price index — even more closely than it does the government’s better-known consumer price index.
Tuesday’s consumer price report shows inflationary pressures remain stubborn and are likely to keep inflation high even as its pace slows.
Typically, the personal consumption expenditures index shows a lower inflation level than the consumer price index. In part, that’s because rents, which have soared, carry twice the weight in the consumer price index that they do in the personal consumption expenditures index.
The personal consumption expenditures price index also seeks to account for changes in how people shop when inflation jumps. As a result, it can capture emerging trends — when, for example, consumers shift away from pricey national brands in favor of less expensive store brands.
The consumer price index showed a worrisome rise from December to January: It jumped 0.5% — five times the November-to-December increase.
Likewise, the government’s measure of wholesale prices, which shows price increases before they hit consumers, rose 0.7% from December to January after having dropped 0.2% from November to December.
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