The latest consumer price index (CPI) report shows that US inflation slowed in January 2024, but
not as much as analysts predicted. The annual inflation rate fell to 3.1%, down from 3.4% in
December 2023. However, economists had forecast a larger drop to 2.9%.
Key Highlights
Monthly CPI rose 0.3% in January, more than the 0.2% increase expected
Core inflation held steady at 3.9% annually, versus forecasts of 3.7%
Housing costs were the main driver, rising 6% from a year earlier
Grocery prices up just 1.2% annually, but restaurant prices jumped 5.1%
Energy prices fell 0.9% monthly, gasoline dropped 3.3%
Annual energy inflation 4.6% lower; gasoline prices down 6.4%
Analysis
The January inflation data dashes hopes that the Federal Reserve could cut interest rates soon.
Price pressures are easing, but not fast enough for the Fed’s 2% target. This inflation report will
likely keep the Fed patient until May or June before reducing rates.
Housing continues to drive overall inflation. Rising rents and home prices reflect strong demand
amid low housing inventory. As home building picks up, this pressure should moderate.
Restaurants are passing higher labor costs to consumers with 5%+ price hikes. But grocery
inflation of just 1.2% shows intense competition is limiting food retailers’ pricing power.
Falling gasoline prices provide relief, but the energy index remains volatile. OPEC+ decisions and
geopolitical risks could send oil and gas prices higher again.
Outlook
Further cooling of demand, improving supply chains, and the lag effect of past interest rate hikes
should bring inflation down steadily. But the January data reiterates the bumpy road back to 2%
inflation.
Aggressive Fed policy and high inflation have sharply slowed growth already. The priority is
calibrating rates to tame inflation without causing a recession.
With the US economy still resilient, the Fed wants clear evidence that core inflation is on a
downward path before pausing rate hikes. This process could take until late 2024 or 2025.
FAQs
What was US inflation in January 2024?
US inflation was 3.1% annually in January 2024, down from 3.4% in December 2023.
Why was January's inflation higher than expected?
Economists predicted a larger drop to 2.9% annually. But housing and food costs offset
falling energy prices.
What drove January inflation higher?
Rising housing costs were the main factor, with rent and home prices up 6% from a year
ago. Restaurant prices also jumped 5.1%.
How did core inflation change in January?
Core CPI, excluding food and energy, held steady at 3.9% annually. The monthly gain was
0.4%, more than expected.
When will the Federal Reserve cut interest rates?
Given the higher than expected inflation, the Fed likely won't cut rates until May or June
2024 at the earliest.
What contributed to lower inflation in January?
Falling energy prices, especially a 3.3% monthly drop in gasoline, helped slow overall
inflation.
Is US inflation likely to keep slowing in 2024?
Yes, but gradually. Cooling demand, improving supply issues, and previous Fed rate hikes
will bring inflation down over time.
Final Thoughts
The January inflation report highlights the difficult balancing act facing the Federal Reserve. Price
pressures are easing but remain too high. The Fed wants clear evidence of moderating inflation
before pausing aggressive rate hikes.
With inflation proving sticky, the central bank is poised to keep interest rates elevated through the
first half of 2024. But officials will be monitoring data closely for signs core inflation is sustainably
reverting to target.
Navigating the economy toward a soft landing remains the Fed’s goal. But risks of recession are
rising given lag effects of tightening. The path to 2% inflation without severe slowdown will likely
be bumpy
Archana Agarwal
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