Consumer prices were up 0.6% month-on-month (m/m) in January, matching December’s pace, and slightly higher than markets were expecting. The year-on-year (y/y) pace of inflation ticked higher to 7.5%.
Food and energy prices both rose 0.9% m/m, and are up 7% and 27% y/y respectively. Within energy a 4.2% m/m increase in electricity costs was the biggest contributor. Food prices continued to rise at a solid clip, up 0.5% m/m, and are up 6.3% y/y.
Core inflation (ex. food and energy) was also hotter than expected, jumping up 0.6% m/m. As a result, the year-on-year rate of core inflation picked up to 6.0%, from 5.5% in December, and the fastest pace in nearly 40 years.
Shelter costs were still a key contributor to monthly inflation, but increased less than they did in December (+0.3% m/m versus +0.4% m/m). Used vehicle prices also continue to rise (+1.5% m/m), although the price for new vehicles was unchanged. Price pressures for medical care accelerated, rising 0.7% m/m. The increase in core inflation over the past year has been fairly broad-based, with virtually all components seeing price increases over the past 12 months.
Overall within core inflation, goods price increases continue to bring the heat, rising 1.0% m/m. Core services were also up a solid 0.4% m/m. Perhaps surprisingly given the Omicron variant, transportation services costs accelerated in January (+1.0% m/m).
Key Implications
Inflation surprised to the upside once again in January. As discussed in our recent report, higher rates will be required to bring demand and supply back into balance and lower the temperature on inflation. The Fed is set to start raising rates in a few short weeks. With inflation continuing to surprise to the upside, the pace of rate hikes is likely to be faster than expected a few months ago.
We expect the year-on-year pace of inflation to slow from its current high level, as supply chains ease and the composition of demand shifts away from goods. Still, it is likely to take some time and base year effects will remain unfavorable over the next few months. In the meantime, elevated price growth is crimping purchasing power and may already be contributing to greater consumer caution.
