Strong aggregate demand driven by job gains and rising real wages that in turn supported robust demand for services, rents and energy resulted in a 0.5% increase in the top-line consumer price index in January and a 0.4% advance in core inflation.
A year-ago basis, the index increased by 3% and core pricing advanced by 3.3%, the Bureau of Labor Statistics reported on Wednesday.
Part of the rise was driven by turn-of-the-year price increases—prescription drug prices jumped by 4.1% and child care and nursery school costs jumped by 7%.
But those price increases were not sufficient to reduce growing concerns about the direction of pricing and its impact on the path of monetary policy given the imminent arrival of tariffs across the economy.
More interesting is how these price increases will translate into changing inflation expectations, which are the key transmission mechanism for a sustained increase in inflation.
Look no further than egg prices, which are the bête noire of the public and policymakers. Driven by a nasty bout of avian flu, egg prices rose by 15.2% in January and by 55.2% from a year ago.
That surge will be what the public sees and will feed into short-term inflation expectations even if investors and sophisticated market actors look through that move, though at their own peril.
Policy considerations
U.S. households, flush with cash and expectations of rising wages, continue to support spending increases at or above a 3% pace.
This strength underscores the stubborn inflation narrative that has been the case for some time.
It also feeds into the view that the Federal Reserve is not going to be reducing its policy rate anytime soon.
Given the pervasive policy uncertainty around tariffs and immigration, the risk is that price volatility in food prices, sticky service costs and stubborn rents will play into rising short-term inflation expectations.
Should those expectations linger, then it will cause longer-term expectations to increase, and that is how we move from one-time price disturbances to a sustained increase in inflation.
The data
Energy prices increased by 1.1% amid a 1.8% increase in gasoline prices, an 11.7% surge in motor vehicle insurance and a 1.4% rise in transportation costs—all of which were the primary drivers of January’s acceleration.
Service costs increased by 0.3% on the month and by 4.4% from a year ago, while service costs excluding energy jumped by 0.5% on the month and by 4.3% annually. The latter figure is more concerning and shows the ongoing robust demand from U.S. households.
The policy-sensitive owners’ equivalent rent series increased by 0.3% on the month and by 4.6% from a year ago.
Read more of RSM’s insights on the economy and the middle market.
Food and beverages increased by 0.3% on the month and by 2.4% annually. Food prices rose by 0.4% and 2.5% over that same time. Beef and veal prices increased by 3.1% annually, ground beef by 5.3%, beef roasts by 5.8%, pork by 2.4% and poultry by 0.6%. Milk prices were up by 1.8%.
New vehicle prices were flat on the month while used cars and trucks increased by 2.2%.
Airline fares increased by 1.2% monthly and by 7.1% annually while medical costs advanced by 0.1% and 2.8%, respectively.
Finally, recreation prices increased by 0.1% on the month, education and communications costs were flat and commodities prices increased by 0.6%.
The takeaway
Inflation accelerated in January as a combination of robust household demand, sticky service costs, suborn rents, turn-of-the-year cost increases and residual seasonality in how the data is estimated all contributed to the rise.
The data will further feed into expectations that the Fed is done cutting rates just as policy uncertainty on trade and immigration is likely to feed into rising inflation expectations.
This rise in the public’s expectations is how one-time price distortions and disturbances become a sustained increase in prices.
