Inflation grew faster in January, bolstering the case for more rate hikes

REAL ECONOMY BLOG | February 14, 2023

Authored by RSM US LLP

Inflation accelerated in January, bolstering the case for the Federal Reserve to continue raising interest rates at its next two meetings.

January’s Consumer Price Index increased by 0.5% on the month, rising from a 0.1% increase in December, and by 6.4% on a 12-month basis, the Bureau of Labor Statistics reported on Tuesday. The annual increase was a slight decline from December’s 6.5% rise.

The increases suggest that the Federal Reserve faces a bumpy road in reducing inflation toward its long-term target of 2% and should serve as a caution against any premature speculation for rate cuts this year.

The strong inflation reaffirmed our call for two more rate hikes of 25 basis points at the Fed’s March and May meetings to bring the its policy rate to 5.25% before the central bank pauses and reassesses the overall impact of its rate increases.

Even core inflation, which excludes more volatile food and energy prices, grew faster at 0.4% from a month ago, or 5.6% from a year ago, down from 5.7% previously.

January’s data came amid a backdrop of significant upward revisions to CPI prints in 2022, showing that inflation cooled less than originally estimated.

Goods inflation rises

The acceleration in inflation echoed an important part of Federal Reserve Chairman Jerome Powell’s speech a couple of weeks ago—which was largely ignored by the market—that goods inflation could come back after some time, putting additional pressure on overall inflation on top of a hot service sector.

That became true in January as core goods prices grew by 0.1% after three months of declines. At the same time, core services prices continued to come in hot, increasing by 0.5% on the month, only slightly lower than the 0.6% increase in December.

The closely watched “super-core” component—core services excluding housing—slowed to a 0.3% gain in January from 0.4% previously. But that did little to slow down the longer-term moving averages of three, six and 12 months, which were all above 6% on an annualized basis.

Our preferred measure—the annualized three-month moving average—showed a 6.3% increase.