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`Not encouraging’: Breaking down the latest inflation numbers

Inflation hit another four-decade high in January and showed little sign of slowing down, suggesting that surging prices will continue to dog President Joe Biden’s economy.

Virtually every category of consumer prices — from food and women’s clothing to rent and airfares — went up.

The Labor Department’s report that consumer prices rose a higher-than-expected 0.6 percent for the second month in a row increased speculation in financial markets that the Federal Reserve might act more aggressively in its campaign of interest rate increases, which are expected to begin next month.

But the central bank may be reluctant to move too fast for fear of spooking investors. In any case, Fed policymakers will get another consumer price index reading before they decide how to approach that next rate-setting meeting in mid-March.

“Today’s report was not encouraging, but it’s premature to conclude that the Fed will move [up rates by half a percentage point] next month,” said Roberto Perli, head of global policy research at Cornerstone Macro. “Even if the next report were to show strong price pressures, I think the Fed will be wary to make an aggressive first step in order not to risk destabilizing markets.”

“That said, if inflation continues to remain very high, the Fed will have little choice than to move fast,” he said.

Let’s look at what we learned from Thursday’s CPI report.

That headline number looks bad

At 7.5 percent, annual inflation is the highest we’ve seen since 1982, and this is the second report in a row where the number has broken 7 percent. But it’s also telling us what we largely knew — over the last 12 months prices have gone up a lot.

The worse number for both the Fed and the White House is that inflation rose 0.6 percent from December to January, because that gives us a better sense of what’s happening now rather than what was going on a year ago. That’s the same pace it grew the month before, meaning that these price spikes don’t seem to be slowing down consistently (there had been a noticeable drop in the previous couple of months, raising hopes that the trend would continue).

Transitory no more

Starting in April 2021 and into the summer, when inflation started its ascent, the price spike was driven by just a few categories like cars, which had gotten more scarce because of a semiconductor shortage. The central bank expected this heightened inflation to only be temporary — “transitory” was Fed Chair Jerome Powell’s preferred word then — because it was being driven by production and shipping delays that were expected to subside as the pandemic faded.

But the supply problems haven’t been resolved, and prices are starting to rise across industries. Used cars are still a big chunk of the increase over the past year, having risen 40.5 percent in that time. But “the increase is broad-based, with virtually all component indexes showing increases over the past 12 months,” the Labor Department said.

Inflation is problematic across the board

Grocery costs rose slightly faster than prices for people eating out in January (1 percent vs. 0.7 percent), but food overall continues to get markedly more expensive. Women’s outerwear prices surged 6.5 percent last month, while dishes and flatware rose 4 percent.

Airline prices also increased 3.4 percent, but on the bright side for travelers: hotel and motel prices saw a 4.2 percent drop. Another silver lining in January: New car prices stopped rising, while used car prices slowed their ascent.

Meanwhile, rents also grew a strong and steady 0.5 percent — a trend that is expected to keep pushing up inflation readings.

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