The so-called core consumer price index — which excludes food and energy costs — increased 0.4% in January after a 0.2% advance in December, Bureau of Labor Statistics figures showed Wednesday. The advance was broad, including higher prices for prescription drugs, car insurance and airfares.
Economists see the core gauge as a better indicator of the underlying inflation trend than the overall CPI that includes often-volatile food and energy costs. The headline measure rose 0.5% from December, the most since August 2023.
The BLS said nearly 30% of the advance was due to shelter, while grocery prices — namely eggs — also drove up the overall index.
Wednesday’s report serves as further evidence that inflation progress is in danger of reversing — which, combined with a solid labor market, will likely keep the Fed on hold for the foreseeable future. Policymakers are also awaiting further clarity on President Donald Trump’s policies, particularly tariffs, which are already causing consumer inflation expectations to rise.
Stock futures dropped while Treasury yields and the dollar spiked after the report. Interest rate swaps showed traders are only expecting one quarter-point Fed rate cut this year. Before the CPI report, traders were leaning toward two cuts.
Earlier Wednesday, Trump again called for lower interest rates before Fed Chair Jerome Powell speaks at the House. On Tuesday, Powell told a Senate committee that the central bank is in no rush to cut rates. While he wouldn’t comment on trade policy, he said that he and his colleagues will have to consider the “net effect” on the economy of all the administration’s policies, including taxes and immigration.
The increase in the CPI was led by grocery prices, with two-thirds of that advance due to higher egg prices. The more-than 15% jump was the largest since June 2015. Costs of hotel stays and used cars also climbed, possibly in the aftermath of deadly wildfires in Los Angeles.
Housing Inflation
Shelter prices, the largest category within services, advanced 0.4% in January. Owners’ equivalent rent and rent of primary residence — subsets of shelter — both rose 0.3%.
The report incorporated new weights for the consumer basket to try to more accurately capture Americans’ spending habits, which resulted in minimal revisions to the CPI last year. Some Fed officials have noted how inflation tends to come in higher early in the year when businesses implement outsize price increases.
Excluding housing and energy, service prices jumped 0.8%, the most in a year, according to Bloomberg calculations. While central bankers have stressed the importance of looking at such a metric when assessing the overall inflation trajectory, they compute it based on a separate index.
That measure — known as the personal consumption expenditures price index — doesn’t put as much weight on shelter as the CPI, which helps explain why it’s trending closer to the Fed’s 2% target. A government report on producer prices due Thursday will offer insights on categories that feed directly into the PCE, which is due later this month.
Goods costs excluding food and energy rose by the most since May 2023. However, when removing used cars, the index was little changed.
Policymakers also pay close attention to wage growth, as it can help inform expectations for consumer spending — the main engine of the economy. A separate report Wednesday that combines the inflation figures with recent wage data showed real hourly earnings grew 1% from a year ago.
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