The Fed’s preferred inflation gauge picked up last month, suggesting prices remain high

The Federal Reserve’s favored inflation measure rose in January, the latest sign that U.S. consumer price gains are slowing from month to month.

The government reported on Thursday that prices rose 0.3% from December to January, up from 0.1% the previous month. But in a more encouraging sign, prices rose just 2.4% year-on-year, down from December’s 2.6% annual gain and the smallest gain in nearly three years.

The year-over-year cooling in inflation is sure to be welcomed by the White House as President Joe Biden seeks re-election. Still, while average wages have outpaced inflation over the past year, many Americans remain frustrated that overall prices remain well above where they were before inflation exploded three years ago. This sentiment is evident in many polls and could pose a threat to Biden’s reelection bid.

Inflation, as measured by the Fed’s preferred measure, fell steadily last year after peaking at 7.1% in the summer of 2022. Supply chain chaos has eased, the cost of components and raw materials has fallen, and a steady flow of job seekers has helped inflation fall steadily over the past year. It is easier for employers to limit wage increases, one of the drivers of inflation. Still, inflation remains above the central bank’s annual target of 2%.

Excluding volatile food and energy costs, prices rose 0.4% from December to January, up from 0.1% the previous month. Year-on-year, such so-called “core” prices rose 2.8%, down from 2.9% in December. Economists believe core prices provide a better gauge of the likely path of future inflation.

Inflation in January partly reflects the fact that businesses often raise prices in the first two months of the year, causing price data in January and February to be at higher levels compared with other months of the year. But the cost of hospital and physician services is also rising, offsetting big pay raises requested by nurses and other much-needed health care workers.

This trend could help keep inflation elevated in the coming months. But by early spring, most analysts expect prices to fall back to the modest pace seen in the second half of 2023, when annual inflation falls to 2%.

Rising inflation in January helps explain concerns among many Fed officials, including Chairman Jerome Powell, that they could cut interest rates too early this year. Christopher Waller, an influential official on the Fed Board of Governors, said this month that he would like to see two more months of inflation data after January to determine whether prices are continuing to cool to the Fed’s target levels .

Since March 2022, the Federal Reserve has raised its benchmark interest rate 11 times to combat the most severe inflation in 40 years. These rate hikes helped cool inflation significantly. But they also make borrowing more expensive for consumers and businesses. In particular, high lending rates have suppressed sales in the home-buying sector, a vital segment of the economy. Instead, whenever the Fed cuts interest rates, it ultimately causes borrowing costs to fall across the economy.

Thursday’s inflation data echoed data released earlier this month that showed the consumer price index, a broader measure of concern to the government, also rose faster in January than in previous months. The Fed prefers the measure unveiled Thursday in part because it takes into account changes in the way people shop when inflation surges — for example, when consumers switch from expensive national brands to cheaper store brands.

Several Fed officials have said they are optimistic that inflation will continue to fall back toward the Fed’s target, with some dismissing recent price increases as a one-off increase.

“The road will continue to be bumpy, and we should not overreact to individual data,” Boston Fed President Susan Collins said Wednesday. “I remain a ‘realistic optimist’ and believe the economy will continue to move toward 2 percent inflation.” rates while maintaining a healthy labor market.”

Some other officials sounded more uncertain. Jeffrey Schmid, the new president of the Federal Reserve Bank of Kansas City, said this week, “When it comes to inflation being too high, I believe we’re not out of the woods yet.”

Outside the Fed, most economists expect inflation to slow steadily, albeit fitfully, in the coming months. Goldman Sachs economists expect core inflation, as measured by the Fed’s preferred indicator, to fall quickly to 2.2% in May, enough for the Fed to begin cutting interest rates in June.