The U.S. Labor Department reported on Tuesday that inflation exceeded expectations in January as high home prices weighed on consumers.
The Bureau of Labor Statistics reported that the Consumer Price Index, a broad measure of the prices consumers pay for goods and services across the economy, rose 0.3% for the month. On a 12-month basis, the figure was 3.1%, down from 3.4% in December.
Economists surveyed by Dow Jones had expected monthly growth of 0.2% and annual growth of 2.9%.
Excluding volatile food and energy prices, core CPI rose 0.4% in January, up 3.9% from the same period last year and unchanged from December. The forecasts are 0.3% and 3.7% respectively.
Home prices account for about one-third of the CPI’s weight and are largely responsible for the increase. The U.S. Bureau of Labor Statistics said the category index rose 0.6% this month, accounting for more than two-thirds of the overall increase. Over the past 12 months, home prices have increased by 6%.
Food prices were also higher, rising 0.4% for the month. Energy helped offset some of the growth, falling 0.9%, mainly due to a 3.3% drop in gasoline prices.
Stock futures fell sharply after the news was announced. Futures tied to the Dow Jones Industrial Average fell more than 250 points, and Treasury yields soared.
Even with rising prices, inflation-adjusted hourly earnings still rose 0.3% this month. However, after adjusting for the fall in average weekly hours worked, real weekly earnings fell 0.3%. Actual average hourly earnings increased by 1.4% compared with the same period last year.
“Inflation is generally moving in the right direction,” said Lisa Sturtevant, chief economist at Bright MLS. “But it’s important to remember that lower inflation doesn’t mean prices for most things are going up. Declining, on the contrary, it just means that prices are rising more slowly. Consumers are still feeling the pressure of rising prices on the things they buy most often.”
The release comes as Fed officials look to set the right balance for monetary policy in 2024. While financial markets have been looking for big interest rate cuts, policymakers have been more cautious in their public statements, focusing on the need to make the data credible. Their guidance rather than preset expectations.
Fed officials expect inflation to fall back to their 2% annual target, in large part because they believe home prices will slow this year. A January rate hike could be problematic for a central bank looking to let its guard down on its tightest monetary policy in more than two decades.
“The highly anticipated CPI report disappointed those who expected inflation to edge slightly lower and for the Fed to begin easing interest rates sooner rather than later,” said Quincy Krosby, chief global strategist at LPL Financial. “Overall The data was hotter than expected, ensuring the Fed will need more data before embarking on a rate-cutting cycle.”
Overall, the inflation data are encouraging even as annual interest rates remain well above the Fed’s 2% target. Additionally, core inflation, which officials believe provides a better guide to longer-term trends, became more stubborn as housing costs were higher than expected.
In recent days, policymakers including Chairman Jerome Powell have said the overall strength of the U.S. economy gives the Fed more time to process the data because it doesn’t have to worry about high interest rates curbing economic growth.
Market pricing ahead of the release of the Consumer Price Index (CPI) pointed to a first rate cut in May, with a total of 5 percentage points possible by the end of 2024, according to CME Group data. However, several Fed officials said they think two or three rate cuts are more likely.
Beyond rising housing costs, the rest of the inflation picture has been mixed.
The price of second-hand cars fell by 3.4%, the cost of clothing fell by 0.7%, and the price of medical goods fell by 0.6%. Electricity costs rose 1.2% and air ticket prices rose 1.4%. In grocery stores, ham prices fell 3.1% and egg prices rose 3.4%.
Don’t miss these stories from CNBC PRO:
