Inflation Continues to Rise but Core CPI Remains Stable

The Consumer Price Index (CPI) report came in hotter than expected even as it appeared that inflation was cooling down at the end of 2022. Inflation increased 0.5% in January on a seasonally adjusted basis versus a rise of 0.1% in December. This was higher than consensus estimates of an increase of 0.4% in January.

Over the past year, the CPI Index increased by 6.4% before adjusting seasonally. This was the lowest yearly rise since the period ending October 2021.

Meanwhile, the Bureau of Labor Statistics (BLS) has changed its methodology for calculating CPI, effective with the January report, and has used consumption data during a one-year period. The BLS has also changed the spending weights used to calculate inflation. For example, the weightage given to the shelter component has risen to 34.4% from 32.9%.

An uptick in home prices was the largest contributor to the CPI index making up around 50% of the monthly all-items increase. The food index jumped by 0.5% in January with the energy index rose by 2%. Food inflation has been stubborn about falling, with prices soaring by 10.1% year-over-year in January.

Excluding food and energy, core CPI rose by 0.4% versus expectations of an increase of 0.3%.

The Fed is watching the CPI index and other economic metrics closely to gauge whether hotter-than-expected inflation warrants a more aggressive stance when it comes to raising interest rates. Economists anticipate that the Fed is likely to raise its benchmark interest by half a percentage point or 50 basis points versus its current target range from 4.5% to 4.75%.

Stock market investors continue to expect a slower pace of rate hikes after Fed Chair Jerome Powell acknowledged in his press conference, following the FOMC decision earlier this month, that he expects “significant declines” in inflation this year. Futures were mixed following the CPI report.