- Consumer prices rose 0.3% month-on-month in January, right on expectations. Total CPI was up 1.4% year-on-year in January, unchanged from December.
- Prices at the pump were once again a key upward force in CPI inflation. Gasoline prices rose 7.4% month/month in January (seasonally adjusted), but remain 8.6% below year-ago levels. In contrast, food prices had heated up through the pandemic, but rose a much milder 0.1% m/m in January. Overall, food prices are up 3.8% versus a year ago, one of the hottest categories in the consumer basket.
- Core prices ex-food and energy were flat for the second straight month in January. As a result, core inflation has lost steam on a year-on-year basis to 1.4%, matching the headline measure.
- The weak reading on core inflation was due to another flat reading for core services prices. Core services inflation continues to lose steam on a year/year basis, running at only 1.3% in January, down from 1.6% in December. Core goods prices rose 0.1% m/m, and are up 1.7% versus a year ago, unchanged from December.
- Delving in the details, prices for transportation services fell again (-0.3% m/m). The recreation index also fell (-0.6% m/m), as did prices for used cars (-0.9% m/m), communication and alcoholic beverages. Apparel prices rose for the third month in a row (+2.2% m/m), medical care costs also rose in January (+0.4% m/m)
- The heavily-weighted shelter index rose a modest 0.1% m/m for the fifth month in a row, and is up only 1.6% year/year in January, a couple of ticks cooler than December. Shelter inflation was 3.3% prior to the pandemic.
Key Implications
- There has been a lively debate in economic circles recently about whether the significant fiscal package proposed by the Biden Administration (see report on Biden’s American Rescue Plan) will trigger an undesirable acceleration in inflation. With inflation still well below the Fed’s 2% target, there is room for inflation to heat up before it reaches a concerning pace.
- As discussed in our recent report, inflation will head higher in the months ahead, as prices are compared to the very low levels of spring 2020 at the height of the pandemic shutdowns. In addition, ramping up costs for many businesses as the economy opens more fully may also trigger higher inflationary pressures. After that, the mountain of fiscal and monetary stimulus that has been unleashed to support the economy, (and the likelihood of more on the way) presents notable upside risk to the inflation outlook. However, as Treasury Secretary, and former Fed Chair, Janet Yellen has pointed out, higher inflation is a situation that policymakers are equipped to deal with. Fed Chair Powell appears to be singing from the same song sheet, emphasizing recently that given the millions of jobs lost over the past year, he is more concerned about the full employment side of the Fed’s mandate than accelerating inflation.
