Inflation rose more than expected in January as stubbornly high home prices weighed on consumers, the Labor Department said on Tuesday.
The consumer price index, a broad measure of the prices shoppers face for goods and services across the economy, rose 0.3 percent for the month, according to the Bureau of Labor Statistics. On a 12-month basis, it stood at 3.1%, up from 3.4% in December.
Economists polled by Dow Jones were looking for a 0.2% monthly gain and a 2.9% annual gain.
Excluding volatile food and energy prices, the so-called core CPI accelerated 0.4 percent in January and rose 3.9 percent from a year earlier, unchanged from December. The forecast was for 0.3% and 3.7% respectively.
House prices, which make up about a third of the CPI’s weighting, are responsible for much of the increase. The index for that category rose 0.6 percent in the month, accounting for more than two-thirds of the increase in funds, the BLS said. On a 12-month basis, the shelter grew by 6%.
Food prices also moved higher, up 0.4% on a monthly basis. Energy helped offset some of the increase, down 0.9% due mainly to a 3.3% drop in gasoline prices.
Stock market futures fell sharply after the announcement. Futures tied to the Dow Jones industrial average were down more than 250 points and bond yields edged higher.
Even with the rise in prices, inflation-adjusted hourly earnings rose 0.3% for the month. However, adjusted for the drop in the average work week, real weekly earnings fell by 0.3%. Real average hourly earnings rose 1.4% from a year ago.
“Inflation is generally moving in the right direction,” said Lisa Sturtevant, chief economist at Bright MLS. “But it’s important to remember that a lower rate of inflation doesn’t mean that the prices of most things are falling – rather, it just means that prices are rising more slowly. Consumers are still feeling the sting of higher prices for the things they buy most often. “
The release comes as Federal Reserve officials try to set the right balance for monetary policy in 2024. Although financial markets are looking for aggressive rate cuts, policymakers have been more cautious in their public statements, focusing on the need to let data their guide, not preconceived expectations.
Fed officials expect inflation to fall back to its annual target of 2% in large part because they believe home prices will slow over the course of the year. The January hike could be problematic for a central bank looking to escape the brake on monetary policy in its more than two-decade-long tightening.
“The long-awaited CPI report is a disappointment to those who expected inflation to ease, allowing the Fed to begin easing interest rates sooner rather than later,” said Quincy Krosby, chief global strategist at LPL Financial. “Overall the numbers were higher than expected, ensuring that the Fed will need more data before starting a rate cut cycle.”
Overall, the inflation data was encouraging, even if annual rates remain well above the Fed’s 2% target. In addition, core inflation, which officials believe is a better guide of longer-term trends, has been even more stubborn as housing costs have remained higher than expected.
In recent days, policymakers including Chairman Jerome Powell have said the broader strength of the U.S. economy is giving the Fed more time to process data as it doesn’t have to worry about high rates crushing growth.
Market prices ahead of the CPI release pointed to a tilt toward the first rate cut coming in May, with a possible total drop of five quarters of a percentage point lower before the end of 2024, according to CME Group data. However, several Fed officials said they believe two or three cuts are more likely.
Aside from the jump in housing costs, the rest of the inflation picture was a mixed bag.
Used vehicle prices fell 3.4%, clothing costs fell 0.7% and medical products fell 0.6%. Electricity costs rose 1.2% and airline fares rose 1.4%. At the grocery store, ham prices fell 3.1% and eggs jumped 3.4%.
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