Photo: Canadian Press
FILE – Unsold 2023 sedans sit in a long line at an Audi dealership on Sunday, Feb. 11, 2024, in Broomfield, Colorado. On Tuesday, the Department of Labor releases its report on consumer-level inflation for January. (AP Photo/David Zalubowski)
Annual inflation in the United States cooled last month but remained high, in the latest sign that the pandemic-fueled price rise is only being brought under control gradually and intermittently.
Tuesday's report from the Labor Department showed that the consumer price index rose 0.3% from December to January, compared with a 0.2% increase the previous month. Compared to the previous year, prices rose 3.1%.
This is less than the 3.4% figure in December and far below inflation's peak of 9.1% in mid-2022. However, the latest reading is still well above the 2% target level of the Federal Reserve, at a time when public frustration with inflation has become a central issue in President Joe Biden's re-election bid.
Excluding the volatile food and energy categories, so-called core prices rose 0.4% last month, up from 0.3% in December and 3.9% over the past 12 months. Underlying inflation is watched especially closely because it typically provides a better read on the likely direction of inflation. The annual value is the same as in December.
Biden administration officials note that inflation has plummeted since pandemic-related supply disruptions and significant government aid sent it soaring three years ago. And a range of forward-looking data suggests that inflation will continue to cool.
Still, even as it approaches the Fed's target level, many Americans remain exasperated that average prices are still about 19% higher than when Biden took office.
The mixed data released Tuesday could reinforce caution among Fed officials, who have said they are pleased with the progress in sharply reducing inflation but want to see more evidence before they feel confident the country is sustainably returning to normal. its target of 2%. Most economists think the central bank will want to wait until May or June to start reducing its benchmark rate from its 22-year high of around 5.4.
The Fed raised its benchmark rate 11 times, from March 2022 to July last year, in a concerted effort to defeat high inflation. The result has been much higher financing rates for businesses and consumers, including mortgages and auto loans. Rate cuts, whenever they occur, would ultimately lead to lower financing costs for many categories of loans.
Fed Chairman Jerome Powell noted during a recent news conference that most of the decline in inflation so far has resulted from falling prices for goods, including used cars, furniture and appliances, which have fallen in six of the past seven months.
In contrast, the costs of services – car repairs, healthcare, hotel rooms, concerts and other entertainment – continue to rise rapidly. Basic services prices, which exclude energy, rose 5.3% in 2023. The Fed will want to see some cooling in services prices to be more certain that inflation is decreasing.
A rate cut by the central bank typically reduces the costs of mortgages, auto loans, credit cards and other consumer and business loans, and can boost the economy. But a much stronger economy could also pose a challenge to the Fed because faster growth could accelerate wages and consumer spending. If companies cannot keep up with increased customer demand, they typically respond by increasing prices, which would worsen inflation.
In the last three months of last year, the economy grew at an unexpectedly fast annual rate of 3.3%. There are signs that growth remains healthy so far into 2024. Companies saw a hiring boom last month. Surveys of manufacturing companies revealed that new orders increased in January. And service companies reported an increase in sales.