U.S. Inflation Spikes Higher For January, As Markets See Fed Action In 2022

If inflation is transitory, January’s CPI (Consumer Price Index) data hasn’t shown much sign of it. Inflation has hit the highest level not just since the start of the pandemic, but 1982. 7.5% inflation is high. It’s not something we’ve seen in the U.S. for 4 decades. Now, the month on month move at a 0.6% price increase for January over December is perhaps little more subdued, but if sustained that still equates to inflation over 7% a year.

Food Prices Up

The drivers of the price increase aren’t much changed from prior months, its just that prices continue to rise steadily. In January food prices saw more of an increase and electricity costs saw a big increase.

However, unlike some releases of 2021, it was less about specific items – most major categories increased in price. We’re now seeing a general, steady rise in prices rather than specific items spiking wildly and driving up the index.

For example, one technique to adjust inflation costs is to remove food and energy from the equation – since those prices can be volatile, but even doing that leaves annual inflation at 6%. Yes, food and energy are moving up, but we’re witnessing sustained price increase across many categories.

Housing Costs

A further puzzle is potentially housing costs. House prices rose just 4.1% for the year to January 2022 according to CPI data. That doesn’t seem to match what other house price indices are measuring with prices up around 15% to 20%. That’s a concern because if house prices are rising at a faster rate than 4%, then that 7.5% inflation number is understated. That’s especially true because shelter costs carry a large weight in the inflation calculation process.

The Market’s Reaction

One reason for a weak January in many stocks globally, was that inflation may be less transitory than many hoped. The Fed is expected to raise rates next month and possibly increase rates three to six times in 2022. The Fed’s next decision will be announced on March 16, assuming no action is taken before, so we may see more commentary from the Fed on inflation at that point.

As we’ve entered February stock markets have struck a more optimistic tone after the January sell-off. Unfortunately today’s CPI data, though just a single month of data, isn’t encouraging. Inflation may well start to subside in 2022, but January’s data hasn’t delivered that.