January CPI: A great disservice

Summary

The January CPI data came in hotter than expected and did little to give the FOMC the "greater confidence" it needs to start imminently cutting rates. Gasoline prices declined for the fourth month in a row, but an outsized jump in energy services and food prices tempered any enthusiasm from the decline in fuel prices. Excluding food and energy, core CPI rose 0.4% in the month, a tenth stronger than the consensus forecast. Core goods prices remained in deflationary territory amid the ongoing normalization between supply and demand for many of the subcategories, such as used autos. However, core services inflation came in hot at 0.7%, the largest gain in 16 months, amid a move higher in price growth for owners' equivalent rent, medical care services and travel services such as airfares and hotels.

On a month-to-month basis, the inflation data can be noisy, and this is particularly true in January when businesses adjust prices at the start of the calendar year in a way that may not always be well captured by the seasonal adjustment process. We suspect inflation will resume its downward trajectory in the coming months. That said, today's report is a reminder that the road back to 2% inflation likely will have some potholes, and it reinforces the hawks on the FOMC who have expressed skepticism that an imminent easing of policy is warranted. There are still two more CPI reports between now and the May FOMC meeting, in addition to a slew of other economic data, but the timing of the first rate cut is at risk of slipping to the summer.

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