Inflation reaches 40-year high: January CPI posts 7.5% annual gain

U.S. inflation accelerated in January, with prices across a wide range of goods and services soaring further amid lingering shortages and supply chain disruptions.

The Consumer Price Index (CPI) released by the Bureau of Labor Statistics Thursday morning registered a 7.5% annual gain in January. Consensus economists were looking for a 7.3% rise, according to Bloomberg data. This represented the fastest rise since 1982, as well as an acceleration from the 7.0% year-over-year increase seen in December.

On a month-over-month basis, consumer price increased by 0.6%, matching December's rate.

Contributions to the headline jump in inflation were broad-based, reflecting widespread price pressures still reverberating across the recovering economy.

Energy prices remained a key contributor to the overall CPI and were up by 27% on a year-over-year basis in January. Within energy, fuel oil prices jumped 9.5% on a monthly basis, tracking the rise in crude oil prices, which rallied to a seven-year high at the beginning of the year. Electricity prices also jumped by a pronounced 4.2% on a month-over-month basis.

Gains in prices for food also contributed to the headline index, as dining at home and out each became more expensive. Food at home prices rose 1% during the month, while food away from home prices rose 0.7%.

But even excluding more volatile food and energy prices, the so-called core CPI rose by 6.0% in January over last year, also marking the biggest jump since 1982. The core CPI had risen by 5.5% in December.

Shelter prices — another primary contributor to inflation gains in recent months — climbed by another 0.3% on a monthly basis in January. This was in turn led by a 0.5% increase in rent prices, which have risen alongside home prices as affordability concerns pushed many individuals to rent instead of buy homes. Prices for lodging away from home, however, dropped by 3.9% on a monthly basis in January, as the Omicron surge at the beginning of the year dampened mobility and demand for hotels and other stays.

"With core CPI inflation hitting a new high of 6.0%, there was little to cheer about in the rest of the report. The 0.6% gain in medical care services prices may also have reflected Omicron disruption, and prescription drug prices also saw an unusually large gain," Andrew Hunter, senior U.S. economist for Capital Economics, wrote in a note. "The acceleration in rent of shelter inflation shows no sign of abating, with owners’ equivalent rent up by 0.4% m/m again and rent of primary residence seeing an even bigger 0.5% gain. Alongside the 0.7% jump in food away from home prices, this underlines our view that a rapid cyclical acceleration in inflation is underway and, with labor market conditions exceptionally tight, it is unlikely to abate any time soon."

Inflation and the Fed

For investors, the latest CPI serves as a key update as to whether inflation has continued to run hot enough to justify a quicker shift toward more hawkish monetary policy from the Federal Reserve. Though the Fed's dual mandate dictates promoting both maximum employment and price stability, the latter component has taken on increased importance as inflation continues to accelerate to new multi-decade highs.

"This latest look at inflation could get the Federal Reserve talking about a potential half-point interest rate hike at their March meeting," Greg McBride, chief financial analyst at Bankrate, wrote in an email Thursday morning. "The next CPI release will be March 10, just days before the Fed meets and during their 'quiet period' which will be too late for them to convey any updated thoughts publicly."

Namely, many market participants are now bracing for the Federal Reserve to begin raising interest rates from current near-zero levels starting in March before completing a series of as many as seven total rate hikes over the course of the year, according to some Wall Street pundits. Other market participants and Fed officials themselves have suggested a less aggressive path forward, however, and Atlanta Fed President Raphael Bostic told CNBC Wednesday that he expected three or four rate hikes in 2022.

But Fed officials have become increasingly wary of the threat of persistent price increases, and of consumers' expectations for further inflation becoming increasingly entrenched. In late January, Fed Chair Jerome Powell conceded that since the end of last year, the inflation situation was "probably slightly worse."

The Federal Reserve is scheduled to convene for its next policy-setting meeting on March 15 and 16.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter

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