US Inflation, More Stubborn Than Expected, Edged Down To 3.1% in January

The high inflation of the past few years is continuing its bumpy ride back down to earth.

The cost of living, as measured by the Consumer Price Index, rose 3.1% over the year as of January, down from 3.4% in December and the lowest since June, the Bureau of Labor Statistics said Tuesday. The annual inflation was higher than the 2.9% rate that forecasters expected, according to a survey of economists by Dow Jones Newswires and the Wall Street Journal.

Prices for gasoline fell in January from December on a seasonally adjusted basis, helping drive down the overall inflation rate despite sharp upticks in food and shelter. The price of food rose 0.4% from December to January, the biggest monthly increase in a year. “Core” inflation, which excludes food and energy prices, fell slightly to 3.9% over the year, where forecasters had projected it to drop to 3.7%, suggesting that price increases are staying more stubborn than expected.

The data showed that the downward trajectory of the high inflation that rocked household budgets and the economy since mid-2021, and which peaked at 9.1% in June 2022, is still rocky. The Federal Reserve is looking for that high inflation to be clearly vanquished before cutting its benchmark interest rate, which it has kept at a 22-year high to combat inflation.

The stubborn inflation data complicates the Fed’s fight against inflation, and has set back the timetable for potential rate cuts. The central bank is attempting a balancing act with its key interest rate, which influences borrowing costs on all kinds of loans. High rates slow the economy and push down inflation by discouraging borrowing and spending, but risk causing a recession.

Fed officials have said they want to be confident inflation is on a sure path down to a 2% annual rate before cutting the fed funds rate from its current 23-year high, where it’s been since July. And concerns about a recession and mass layoffs have faded recently, as U.S. economic output and the labor market have shrugged off high interest rates and defied expectations for a major slowdown.

“This ‘super-bad’ inflation report for January, along with resilient first-quarter U.S. economic growth, has got to be concerning for the Fed and calls into question market forecasts for aggressive and early rate cuts this year,” Scott Anderson, chief U.S. Economist at BMO Capital Markets, wrote in a commentary.

Market expectations that the Fed will start cutting interest rates fell after the release of the CPI numbers. Market participants were pricing in just a 39% chance that the Fed would start cutting rates at its May monetary policy meeting, down from 57% before the release, according to the CME Group’s FedWatch tool, which forecasts interest rate movements based on fed fund futures trading data.

UPDATE: This article has been updated after initial publication to include a chart of price increases in the consumer price index and commentary from an economist.