empty
10.02.2022 06:42 PM
US consumer prices jump strongly in January

US consumer prices rose solidly in January, leading to the biggest annual increase in inflation in 40 years. Such news could spark debate among investors and traders about the size of the Federal Reserve's interest rate hike next month.

This image is no longer relevant

The consumer price index gained 0.6% last month after increasing 0.6% in December, the Labor Department said. In the 12 months through January, the CPI jumped 7.5%, the biggest year-on-year increase since February 1982.

That marked the fourth straight month of annual increases in excess of 6%. Economists had forecast the CPI rising 0.5% and accelerating 7.3% on a year-on-year basis.

Effective with the January report, the CPI was re-weighted based on consumer expenditure data from 2019-2020. The new weights, which are based on spending habits in 2019 and 2020, include changes like a bigger weighting for used cars and trucks - a reflection of how the pandemic changed consumption patterns in the US.

"This is a goods-dominated inflation backdrop," said Tom Porcelli, chief US economist at RBC Capital Markets LLC, who noted that merchandise now has a larger weighting in the CPI. "If the transition from goods to services spending is slower to evolve this year, you could continue to see some additional upward pressure on inflation."

The economy is grappling with high inflation, caused by a shift in spending to goods from services during the COVID-19 pandemic. Trillions of dollars in pandemic relief fired up spending, which ran against capacity constraints as the coronavirus sidelined workers needed to produce and move goods to consumers.

Soaring inflation has reduced purchasing power for households and eroded President Joe Biden's popularity. As many pointed to last year's White House stimulus bill as a key factor in the price rise, Biden's approval ratings took a big hit. This is despite the economy growing at its strongest rate in 37 years in 2021 and the labor market rapidly churning out jobs. Meanwhile, several indicators of wage inflation have risen sharply in recent months.

The Fed is expected to start raising rates in March, to rein in inflation, which has overshot the US central bank's 2% target. However, the amount of the increase remains questionable.

No doubt, the regulator will take into account the impressive rise in inflation. On the other hand, markets are already ready for such news.

Financial markets are predicting a 25% chance of a 50 basis points increase, according to CME's FedWatch tool. However, this figure will now rise, in part because price pressures are intensifying.

Economists, however, believe it is unlikely that the Fed would move so aggressively. They expect the central bank to raise rates by 25 basis points at least seven times this year.

"The Fed does not want to create undue volatility in its first hike, which only makes further increases more difficult," said Scott Ruesterholz, a Portfolio Manager at Insight Investment in New York. "Rather, the Fed would be more likely to guide to an accelerated pace of hikes at consecutive meetings to crack down on inflation."

Food prices rose 0.9% in January, the most in three months, and energy costs also advanced 0.9% on gains in fuel oil and electricity.

Residential electricity costs increased last month by the most in 16 years. From a year ago, food inflation is up 7%, the most since 1981.

Excluding the volatile food and energy components, the CPI increased 0.6% last month after rising 0.6% in December.

In the 12 months through January, the so-called core CPI jumped 6.0%. That was the largest year-on-year gain since August 1982 and followed a 5.5% advance in December.

Rising rents and shortages of goods such as cars, microchips, sports equipment, cosmetics and household chemicals and furniture, with some alarming growth in previously unseen categories such as health services, which have a much greater weight in the PCE deflator, the Fed's preferred price indicator, are fuelling the underlying consumer price index much more than before.

Although imports of goods increased to a record high in December as ships were still able to unload after months of delays due to labour shortages at ports, shortages of goods continue. Vehicle inventories in the wholesale trade rose in December to their highest level in 10 years, reflecting a specific increase in the importance of getting goods to the consumer.

Still, inflation will remain high for a while, in part reflecting the delayed impact of rising wages. Employers are boosting compensation as they compete for scarce workers. There were 10.9 million job openings at the end of December.

Inflation-adjusted average hourly earnings fell 1.7 per cent in January from a year earlier, marking the 10th straight decline.

Shelter costs, which are considered to be a more structural component of the CPI and make up about a third of the overall index, climbed 0.3% from the prior month. The increase reflected the biggest jump in rent of primary residence since May 2001. Owners' equivalent rent also rose. However, the cost of temporary accommodation such as hotels fell by 0.3%, probably reflecting the lower travel intensity of Americans.

Like wage increases, shelter is often considered a "sticky" component of inflation, meaning once prices rise, they're less likely to come back down. A sustained acceleration in structural categories like shelter, rather than surges in volatile CPI components such as energy, presents a more serious threat to the central bank's inflation target.

Still, monthly inflation could slow down in the coming months as supply bottlenecks are removed, as coronavirus infections caused by the Omicron variant subside. However, the process is unlikely to start before May 2022.

Kevin Cummins, one of the leading analysts and economists in the US, believes that the factors that have driven inflation higher in 2021 are only expected to dissipate gradually and are likely to keep pushing inflation higher through the first half of 2022. "We expect that there will be a shift from goods inflation, particularly motor vehicle and commodities prices to more persistent services inflation, such as wages and heavily-weighted rents," he said.

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits fell 16,000 to a seasonally adjusted 223,000 for the week ended February 5. Economists had forecast 230,000 applications for the latest week. Claims increased from the beginning of January through the middle of the month as Omicron raged across the country. They have dropped from a record high of 6.149 million in early April 2020.

US Treasury yields rose, the dollar gained, and the S&P 500 fell at the opening of trading. A broad sell-off should be expected during this and the next trading session, including in the Asian sector.

Notably, economists underestimated the monthly change in CPI in eight of the last 10 months.

Egor Danilov,
Analytical expert of InstaForex
© 2007-2025
Select timeframe
5
min
15
min
30
min
1
hour
4
hours
1
day
1
week
Earn on cryptocurrency rate changes with InstaForex
Download MetaTrader 4 and open your first trade
  • Grand Choice
    Contest by
    InstaForex
    InstaForex always strives to help you
    fulfill your biggest dreams.
    JOIN CONTEST

Recommended Stories

Falling indices, Tesla's surge, and Julius Baer's collapse: a day of sharp contrasts in the markets

Rge benchmark stock indices are falling: * Dow -0.27%, * S&P 500 -0.39%, * Nasdaq -0.38% Tesla is rising after Musk announced his willingness to return as CEO. Home Depot

12:40 2025-05-21 UTC+2

US Market News Digest for May 21

Following a staggering $8.6 trillion rally, the US market is showing signs of fatigue. Despite negative macroeconomic indicators and the recent US credit rating downgrade, Morgan Stanley maintains a bold

Ekaterina Kiseleva 12:23 2025-05-21 UTC+2

The Dollar Is No Longer King. What You Need to Know

Historically, the U.S. dollar has been the primary safe haven during crises such as wars, sanctions, and banking shocks; investors tend to flock to the dollar as their ultimate safety

Anna Zotova 00:59 2025-05-21 UTC+2

US Market News Digest for May 20

Despite the downgrade of the US credit rating and rising Treasury yields, retail investors remain active buyers of equities. Net purchases have surged to a record $4 billion, signaling confidence

Ekaterina Kiseleva 12:16 2025-05-20 UTC+2

Market Gains Modestly: Dow +0.32%, Nasdaq +0.02%, but Novavax Soars After Vaccine Approval

Dow Up 0.32%, S&P 500 Up 0.09%, Nasdaq Up 0.02% TXNM Energy Rises After Blackstone Deal Novavax Jumps After FDA Approval of Coronavirus Vaccine European Stocks Rise Slightly, as Utilities

Thomas Frank 11:18 2025-05-20 UTC+2

Bitcoin: What to Expect This Week. BTC Hits $107,000 – Can the Record Hold?

The leading cryptocurrency is fighting to maintain its position, even though it's not always smooth sailing. Currently, BTC is out in front, slightly simplifying the task of holding higher ground

Larisa Kolesnikova 00:40 2025-05-20 UTC+2

US consumption losing steam

In the upcoming week, Wall Street's attention will be focused on earnings reports from the largest US retail chains — crucial indicators of how changing trade conditions are impacting

13:30 2025-05-19 UTC+2

US Market News Digest for May 19

Despite encouraging statements about progress in trade negotiations and high-level diplomatic visits, forecasts for the S&P 500 remain restrained. Analysts point to the index's lack of growth compared

Ekaterina Kiseleva 12:20 2025-05-19 UTC+2

The American consumer is slowing down: What Target, Lowe's and Walmart are saying

Wall Street will be focused on earnings reports from the largest US retailers this week to gauge how changing trade conditions are affecting the economy and whether the recent stock

Thomas Frank 10:35 2025-05-19 UTC+2

US Market News Digest for May 16

Shares of Micron Technology are extending their steady rally, bolstered by encouraging technical signals. Investors are eyeing price targets at 117.34 and 137.12, making the stock attractive in both

Ekaterina Kiseleva 13:20 2025-05-16 UTC+2
Can't speak right now?
Ask your question in the chat.
Widget callback
 

Dear visitor,

Your IP address shows that you are currently located in the USA. If you are a resident of the United States, you are prohibited from using the services of InstaFintech Group including online trading, online transfers, deposit/withdrawal of funds, etc.

If you think you are seeing this message by mistake and your location is not the US, kindly proceed to the website. Otherwise, you must leave the website in order to comply with government restrictions.

Why does your IP address show your location as the USA?

  • - you are using a VPN provided by a hosting company based in the United States;
  • - your IP does not have proper WHOIS records;
  • - an error occurred in the WHOIS geolocation database.

Please confirm whether you are a US resident or not by clicking the relevant button below. If you choose the wrong option, being a US resident, you will not be able to open an account with InstaForex anyway.

We are sorry for any inconvenience caused by this message.