Fed caution confirmed by January inflation data

February 13, 2024

The consumer price index (CPI) rose 0.3% in January, slightly hotter than expected for the month. The annual pace of inflation slowed to 3.1%, which is still down from the 3.4% of December. We have yet to move below the 3% threshold persistently. That is a threshold the Federal Reserve would like to see us break on the annual pace of inflation consistently before cutting rates. Food prices accelerated after cooling in recent months; food at grocery stores accelerated along with food away from home.

Prices at the gas pump fell another 3.3% in January. The average price of a gallon of regular gasoline dropped to $3.20 in January, the lowest level since June 2021 but still a little more than $0.66 a gallon above its February 2020 level.

The core CPI, which excludes the volatile food and energy components, rose 0.4% in January, slightly faster than in December. The core CPI rose 3.9% from a year ago, the same as December. The largest drop in prices showed up in used vehicle prices, which fell 3.4% on a month-to-month basis; they are down 3.5% from a year ago. Financing rates for new and used vehicles jumped in January, after a reprieve in December, and are suppressing demand. New vehicle prices moved sideways. Incentives have picked up and are expected to gain momentum over the course of the year.

Household furnishings and appliances continued their descent, with the pace of declines growing. Much of that weakness reflects the sharp slowdown in existing home sales in the fourth quarter, which were hammered by the surge in mortgage rates above 7% during the quarter.

Shelter costs, which account for more than a third of overall inflation, picked up a bit. An acceleration in owners’ equivalent rents and a surge in hotel room rates accounted for much of the increase in shelter costs. Apartment rents are still running hot but have begun to cool from where they were earlier in the cycle. It takes time for a drop in apartment rents, which is showing up in what were some of the hottest pandemic markets, to filter through to leases. The drop is not in all markets. Chicago, which did not have a lot of new construction in recent years, is not seeing the concessions of places such as Austin. The shelter component has been widely expected to slow and is still expected to ease in the months to come.

The super core services measure of inflation, which strips out shelter and energy services, jumped 0.8% after rising 0.3% in December. That is the fastest monthly gain for the super core since April 2022, when inflation was still accelerating. The super core jumped 4.4% from a year ago, up from 3.9% the previous month. That is the fastest annual pace since May 2023. Gains in medical costs, medical insurance and vehicle insurance all accelerated during the month. Motor vehicle insurance is rising at its fastest annual pace since 1976, which is further undermining the affordability of new and used vehicles. The super core is watched closely by the Federal Reserve as it is the most sensitive to wage costs and where it fears we could see the improvements in inflation stall out.