According to the latest consumer price index (CPI) figures, U.S. inflation eased to 6.4% in January, cooling from its 40-year peak in June but still well above the Federal Reserve’s 2% target goal.
The CPI, a comprehensive measure of the average price for a basket of consumer goods and services, rose 0.5% in January compared to the previous month, the U.S. Bureau of Labor Statistics (BLS) reported Tuesday. Inflation rose 6.4% in January compared to the last January, but still down from the 6.5% year-over-year mark reported for December.
The index for shelter was the largest contributor to inflation, accounting for nearly half of all increase, the BLS said. The food, gasoline, and natural gas indexes also contributed to January’s inflation increase.
January’s headline was the seventh monthly decrease in annual inflation and marked the lowest reading since U.S. inflation hit its 9.1% peak in June 2022. In addition, historical inflation data shows that Tuesday’s 6.4% headline inflation reading marked the smallest 12-month increase since October 2021.
Core CPI — which excludes the volatile prices of food and energy — rose 0.4% in January after increasing 0.4% in December, according to the BLS report. On a 12-month basis, core inflation climbed to 5.6%, down from 5.7% the month before.
Categories that increased in January include shelter (+0.7%), motor vehicle insurance (+1.4%), recreation (+0.5%), apparel (+0.8%), and household furnishings and operations (+0.3%). The report also notes a 0.4% increase in the communication index. The indexes that decreased over the month include the index for used cars and trucks (-1.9%), medical care (-0.4%), and airline fares (-2.1%).
Federal Reserve Chairman Jerome Powell suggested at a recent discussion that inflation would not likely go away quickly and painlessly, telling the audience that a sustained return to 2% inflation is likely to pose a more serious challenge than expected.
“The base case for me,” Powell said, “is that we’ll have to do more rate increases, and then we’ll have to look around and see whether we’ve done enough.”
Given Tuesday’s 5.6% core CPI reading, the Fed is far from achieving its 2% target goal, according to Maria Vassalou, co-chief investment officer of Multi-Asset Solutions at Goldman Sachs Asset Management.
“The strength of core inflation suggests that the Fed has a lot more work to do to bring inflation back to 2%,” Vassalou said in a note reported by Yahoo Finance. “If retail sales also show strength tomorrow, the Fed may have to increase their funds rate target to 5.5% in order to tame inflation.”
The sentiment that the federal reserve will need to push interest rates higher for longer is shared by Mitch Kramer, a financial advisor at Dallas-based wealth management firm Fluent Financial.Â
“I can see the Fed raising its federal funds rate to 5.5% or even higher,” Kramer told The Dallas Express. If next month brings another strong jobs report or a similar inflation reading, then “I don’t see 6% being off the table,” he added.
As of the last Federal Open Market Committee meeting, which took place on February 1, the U.S. Central Bank projected the terminal interest rate — the long-term target — to peak between 5% and 5.25%. This was after Fed members approved an eighth rate hike, raising interest by 25 basis points and lifting the fed funds rate to a 4.5%-4.75% target range, according to The Federal Reserve Bank of New York.
If interest rates get as high as 6%, Kramer says the American consumer will get stuck paying much more to finance purchases on financial tools like credit cards, bank loans, mortgage loans, and more.
“The higher cost of borrowing money is going to put a squeeze on the consumer’s budget, creating even more stress,” Kramer told The Dallas Express. “Right now, the U.S. is raising rates higher than other global central banks to kill inflation” and to “avoid a repeat of the 70s,” he explained.
To avoid unexpected financial burdens, Kramer says that consumers should evaluate their balance sheets and keep debts down as much as possible. Chances are that debt “is going to cost a lot more in the future, so minimize using credit cards as much as possible,” he cautioned.
