US inflation slows but remains elevated
Sign that price pressures are easing only gradually
CONSUMER INFLATION inthe United States (US) cooled last month yet remained elevated, in the latest sign that the pandemic-fuelled price surge is only gradually and fitfully coming under control.
Yesterday’s report from the Labor Department showed that the consumer price index rose 0.3 per cent from December to January, up from a 0.2 per cent increase the previous month. Compared with a year ago, prices are up 3.1 per cent.
That is less than the 3.4 per cent figure in December and far below the 9.1 per cent inflation peak in mid2022. But the latest reading is still well above the Federal Reserve’s two per cent target level at a time when public frustration with inflation has become a pivotal issue in President Joe Biden’s bid for re-election.
Excluding volatile food and energy costs, so-called core prices climbed 0.4 per cent last month, up from 0.3 per cent in December. On a year-over-year basis, core prices were up 3.9 per cent in January, the same as in December. Core inflation is watched especially closely because it typically provides a better read of where inflation is likely headed.
Biden administration officials frequently note that inflation has plummeted since pandemic-related supply disruptions and significant government aid sent it soaring three years ago. And a raft of forwardlooking data suggests that inflation will continue to cool.
Still, even as it nears the Fed’s target level, many Americans remain exasperated that average prices are still about 19 per cent higher than they were when Biden took office.
From December to January, average national gas prices tumbled 3.3 per cent, the government said. Yet so far this month, the average price has climbed higher, rising 15 cents to $3.23 a gallon as of yesterday, according to the American Automobile Association.
Grocery prices rose 0.4 per cent from December to January, the biggest such rise in a year, though compared with 12 months earlier, food prices are up just 1.2 per cent.
The costs of physical goods, including clothing, used cars and prescription drugs, fell for a third straight month. Lower prices for goods are the key driver that is cooling inflation.
By contrast, the prices of services — hotel rooms, restaurant meals, auto insurance, apartment rents and the like — are still rising faster than they did before the pandemic and keeping overall inflation persistently high. The cost of car insurance has soared more than 20 per cent, on average, compared with a year ago.
SHARPLY REDUCING INFLATION
The mixed data released yesterday could reinforce the caution of Fed officials, who have said they’re pleased with the progress in sharply reducing inflation but want to see further evidence before feeling confident that it’s sustainably headed back to their two per cent target. Most economists think the central bank will want to wait until May or June to begin cutting its benchmark rate from its 22-year high of roughly 5.4 per cent.
The Fed raised its key rate 11 times, from March 2022 to July of last year, in a concerted drive to defeat high inflation. The result has been much higher borrowing rates for businesses and consumers, including for mortgages and auto loans. Rate cuts, whenever they happen, would eventually lead to lower borrowing costs for many categories of loans.
Fed Chair Jerome Powell noted during a recent news conference that most of the decline in inflation so far has stemmed from lower prices for goods, including used cars, furniture and appliances, which have dropped in six of the past seven months.
By contrast, the costs of services — auto repairs, healthcare, hotel rooms, concerts and other entertainment — are still rising briskly. Core services prices, which exclude energy, jumped 5.3 per cent in 2023. The Fed will want to see some cooling in services prices to become more assured that inflation is declining.
A rate cut by the central bank typically lowers the costs of mortgages, auto loans, credit cards and other consumer and business borrowing, and could bolster the economy. But a much stronger economy could also pose a challenge for the Fed, because faster growth can accelerate wages and consumer spending. If businesses aren’t able to keep up with greater customer demand, they typically respond by raising prices, which would worsen inflation.
In the final three months of last year, the economy grew at an unexpectedly rapid 3.3 per cent annual rate. There are signs that growth remains healthy so far in 2024. Businesses engaged in a burst of hiring last month. Surveys of manufacturing companies found that new orders rose in January. And services companies reported an uptick in sales.