Yesterday, the Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5% on a seasonally adjusted basis is January, after rising 0.4% in December. Year-over-year, the increase was 3.0%, up from 2.9% in December.
The so-called core CPI, all items less food and energy, increased 0.4% in January, up from 0.2% in December. Year-over-year, the core CPI increased 3.3% in January, up slightly from 3.2% in December.
Stocks and bonds sold off on the news. The S&P 500 fell 0.72% at the open, but pared its losses to 0.27% by the end of the trading session. The yield on the 10-year Treasury note spiked higher by 11 basis points (bp) to 4.63% and held that level throughout the remainder of the day. The CBOE’s Fed Watch tool now assesses a near 100% probability that the target Fed Funds rate will hold steady at the FOMC’s next meeting in March and a 66% probability that the target rate will remain either unchanged or drop by 25 bp by the end of the year.
Media chatter asserts that consumer inflation has been on the rise for several months now, and is well above the FOMC’s target; while the core rate has been stuck at or near 3.3% for eight months.
A different view of the data suggests that there may be less cause for worry.
The chart below shows the annualized 3-month change in unadjusted CPI-U, both headline and core, from July 2020 to January 2025.
On this basis, the chart shows the waves of inflation that U.S. urban consumers have faced since the early onset of the COVID-19 pandemic in 2020. Contrary to the view that inflation has been running hot, the chart shows in fact that prior to January’s reading, inflation had been well behaved. The annualized 3-month change in headline CPI-U was below 2% for six consecutive months (to December 2024). Core CPI-U was likewise below 2% in July and August, rose to a peak of 3.2% in October and then fell to a low of 1.1% in December.
The chart is based upon the unadjusted (i.e. non-seasonally adjusted) index levels, which is what the BLS publishes in its CPI report. As such, some of the ebbs and flows in the chart could be due in part to seasonal factors. Nevertheless, the spikes in the chart were mostly caused by demand pressures, supply chain shocks and other factors that pushed up the average level of inflation. Inflation has clearly been slowing in recent years. The data over the past year suggests so far that the slowing trend has continued.
Nevertheless, the jump in the January annualized inflation rates, which show up clearly in the chart above is notable. Factors which drove the January increase include a jump in food inflation to the highest level in several years, with a big jump in food at home. There was also an increase in the rate of inflation for services (excluding food and energy services), which rose to the highest since last May. There, shelter costs increased 3.9% annualized, after having fallen back to around 3.0% in November and December. This acceleration in shelter costs is surprising, given that house price measures, such as the S&P/Case-Shiller index, have been decelerating for months now. Other services, including energy, transportation, education and communication services have also been rise at an elevated pace.
Some of the factors which caused the spike in January CPI do not seem sustainable. Even so, I am watching to see whether January’s spike continues over the next couple of months before concluding that the resurgence in inflation is worrisome.
February 13, 2025
Stephen P. Percoco
Lark Research
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