Consumer Price Index January 2024

Inflation stalls in the red zone, but we're not excessively concerned 
 

• January Consumer Price Index (CPI) readings are always volatile, so this reading should be taken with a pinch of salt. Headline CPI rose more than expected, up 0.3% month over month (m/m) in January, despite lower energy and core goods prices.
  
  
• Core CPI also rose faster than anticipated, up 0.4% m/m. This was the strongest print in nine months owing to a hot reading for core services driven by broad-based gains in shelter costs, and transportation and medical care prices. The Fed’s favored supercore CPI measures (core services excluding shelter costs) rose a hot 0.85% in January.
  
  
• As a result, headline CPI inflation eased less than anticipation, falling 0.3 percentage points (ppt) to 3.1% year over year (y/y) while core inflation was flat at 3.9% y/y – the lowest since May 2021.
  
  
• The short-term dynamics were also disappointing. On a three-month annualized basis, headline CPI picked up 0.9ppt to 2.8%, while core CPI picked up 0.7ppt to 4.0%. On a six-month annualized basis, headline CPI rose 0.2ppt to 3.3%, while core CPI inflation rose 0.4ppt to 3.6%.
  
  
• While this report will undoubtedly spark a wave of inflation pessimism, five key elements should still form the perfect mix for disinflation through 2024: cooler consumer demand growth; declining rent inflation; narrower profit margins; moderating wage growth; and stronger productivity growth.
  
  
• Fed policymakers will likely put this inflation report in the “Not so good” column as they continue to exercise caution in assessing when to start easing policy. Our long-standing view has been that the Fed would start cutting rates in May, but this report increases the odds of a June onset. We still expect a total of 100 basis points (bps) of rates cuts this year. Markets appear to slowly be aligning to this view.
   

Looking into the details
 

Energy prices fell 0.9% m/m – the fourth consecutive decline – as a 3.3% decline in gasoline prices was partially offset by a 1.2% increase in electricity prices and a 2.0% increase for utility gas prices.
 

Food prices rose a moderate 0.4% m/m on moderate 0.5% gains in restaurant prices and a 0.4% increase in grocery store prices. Grocery store price inflation has moderated markedly from a peak of 13.5% y/y in August 2022, to just 1.2% y/y. Still, cost fatigue is perceptible as price levels remain significantly higher than pre-pandemic.
 

Core goods prices fell 0.3% in January as used car prices plunged 3.4% m/m and new car prices were flat. Used car prices are now 3.5% lower than last year while new car price inflation has slowed from 5.8% in January 2023 to 0.7% y/y. Apparel prices fell 0.7% m/m and are now up only 0.1% from a year ago.
 

Core services prices rose a stronger than expected 0.7% m/m – above the average 0.4% m/m gain over the prior six months. The Fed’s favorite “supercore” CPI gauge– its strongest print since April 2022 – sowing some concern about the disinflation momentum for core services.
 

Looking into the services details, transportation costs rose 1.0% m/m with the major contributor being motor vehicle insurance prices rising 1.4% m/m – the 27th consecutive monthly gain – as insurance companies factor the higher vehicle prices and higher costs of repair. Car rental prices fell 0.7% while airfares rose 1.4% m/m. Car rental prices are about 18% higher than pre-pandemic while airfares are about 2% lower.
 

Medical care services were strongly influenced by annual pricing resets in January. Overall, they rose 1.0% m/m – the strongest gain since January 2022 – driven higher by a 1.6% gain in hospital services – the largest since January 2018. Outpatient hospital services prices rose by the most since January 2009, up 2.0% m/m. Health insurance prices rose 1.4% m/m on a non-seasonally adjusted basis – in line with monthly gains over the next six months according to the Bureau of Labor Statistics’ new health insurance methodology.
 

The start of the year also brough of number of significant price increases for various personal services and internet, up 1.5% m/m.
 

Shelter costs rose more than expected, up 0.6% m/m, as rent prices rose 0.4% m/m – in line with the two prior months – but owners’ equivalent rent posted a 0.6% advance – the largest since April 2023. Another major contributor was the 0.7% rise in non-seasonally adjusted home insurance cost, pushing the average monthly gain over the past six months to 0.5% m/m. Hotel prices also rose strongly, up 2.4%.