Inflation rises faster than expected in January as high prices persist

Inflation rose more than expected in January thanks to a jump in grocery and housing costs, underscoring the challenge of taming price pressures within the economy.

The Labor Department said Tuesday that the consumer price index, a broad measure of the price of everyday goods including gasoline, groceries and rent, rose 0.3% in January from the previous month. Prices climbed 3.1% from the same time last year.

Both of those figures came in higher than the 0.2% monthly increase and 2.9% headline figure forecast by Refinitiv economists.

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Other parts of the report indicated that inflation has been slow to retreat. Core prices, which exclude the more volatile measurements of food and energy, climbed 0.4% – the largest monthly increase since April 2023. It rose 3.9% annually. Both of those figures are slightly higher than estimates.

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Altogether, the report indicates that while inflation has fallen considerably from a peak of 9.1%, it remains above the Federal Reserve's 2% target. 

High inflation has created severe financial pressures for most U.S. households, which are forced to pay more for everyday necessities like food and rent. The burden is disproportionately borne by low-income Americans, whose already-stretched paychecks are heavily affected by price fluctuations.

Housing costs were the biggest driver of inflation last month. Rent costs rose 0.6% for the month and are up 6.1% from the same time last year. Rising rents are concerning because higher housing costs most directly and acutely affect household budgets.

Other price gains also proved persistent in January. 

Food prices, a visceral reminder of inflation for many Americans, rose 0.4% over the course of the month. Grocery costs also rose 0.4% last month and are up 1.2% compared with the same time last year.

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The price of both health insurance and auto insurance also jumped in January, rising 1.4% over the course of the month. 

"Overall inflation continues to grind lower, but the drop in core inflation virtually ground to a halt last month, mainly because of shelter prices," said Robert Frick, corporate economist at Navy Federal Credit Union. "Other service costs remain stubbornly strong, while the food price increases are particularly painful. Breaking the 3% level is proving tougher than expected."

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The Federal Reserve has signaled it is closely watching the report for evidence inflation is continuing to subside as policymakers try to determine what comes next for interest rates in 2024. 

Central bank officials have opened the door to cutting interest rates this year, but they have pushed back against the market's aggressive expectations. Chair Jerome Powell said during the Fed's most recent meeting that a March rate cut is likely off the table as policymakers do not have enough confidence that inflation is on the path back to 2%.

Stock futures dove on Tuesday morning after the surprisingly hot January inflation report disappointed investors betting the central bank would start cutting rates sooner rather than later.

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"The final mile towards the Fed’s 2% target was always going to be slow, erratic, and frustrating," said Seema Shah, chief global strategist at Principal Asset Management. "What today’s report does emphasize, however, is that without a cooling of the labor market and economy, inflation progress is likely to come to a halt. A March cut is completely off the agenda, but May could still be in play if economic activity plays ball and finally starts to show the impact from prior Fed tightening."