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A tsunami of inflation crested in the U.S. last summer and has ebbed in recent months, but the Federal Reserve is still worried about prices getting stuck at high levels.
Here’s what to watch in the consumer price index on Tuesday morning.
The forecast
The consumer price index is forecast to climb 0.4% in January, according to economists polled by The Wall Street Journal. It would be the largest increase in three months, abetted by higher gas prices and persistent food inflation.
The Fed and Wall Street
DJIA,
SPX,
investors want more evidence inflation is cooling, especially after the CPI for December was revised to show a small increase instead of a decline.
A higher-than-expected CPI increase would set off alarm bells and suggest inflation might be stickier than previously believed.
The upward revision in December has contributed “to growing doubts that the recent deceleration in inflation will persist,” said chief economist Richard Moody of Regions Financial.
A raft of senior Fed officials, led by Chairman Jerome Powell, expressed concern about inflation last week after a stunningly strong January jobs report. Some suggest interest rates might need to go higher than forecast to tame inflation.
The annual rate of inflation is seen slowing to 6.2% from 6.5%, leaving it still well above the Fed’s 2% goal.
‘Core’ prices
The Fed and investors pay closer attention to the increase in consumer prices minus food and gas since it’s viewed as a better predictor of future inflation trends.
This so-called core CPI is forecast to rise 0.3% in January.
The yearly rate of core inflation is seen slowing to 5.4% from 5.7% in the prior month.
A ‘super’ kind of inflation
The rate of inflation in goods — think gas, appliances, consumer electronics, used cars and the like — has cooled somewhat. Goods inflation has slowed to just 2.1% from a peak of 12.3% nearly one year ago.
Not so for services provided by restaurants, retailers, hotels, banks, entertainment venues and the like. That’s the largest part of the U.S. economy.
The Fed is monitoring a category that’s become known to Wall Street economists as “supercore” inflation — service inflation minus energy and housing.
After climbing less than 3% a year in the decade before the pandemic, supercore inflation surged to a 40-year high of almost 7% last fall.
Supercore inflation has since slowed a bit to a 6.3% rate, but Fed officials are watching it closely to see if it continues to recede.
Don’t look for the number in the CPI report, however. It doesn’t exist. The Fed does its own calculations, as do Wall Street economists. MarketWatch will publish the number in our own CPI report.
Rents and housing
Rents and housing played a big role in the spike in U.S. inflation, but home prices have retreated due to high mortgage rates and rents aren’t rising as rapidly as they did last year.
The slowdown in housing costs, if it continues, is expected to have a big impact in reducing the rate of inflation.
The only problem is, the change in housing costs can take up to six months to be reflected in the CPI because of how it is calculated.
What the Fed wants to see are smaller month-to-month increases.
The cost of shelter jumped a worrisome 0.8% in December, pushing the annual rate of increase to a 40-year high of 7.5%.
The number is expected to deflate soon, but the quicker it falls the less the Fed will be prone to more aggressive measures to combat inflation.
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