CPI Report: Inflation Rose Unexpectedly in January

U.S. inflation rose to 3 percent in January, strengthening the case for the Federal Reserve to extend a pause on interest rate cuts.

The Consumer Price Index jumped more than expected, data from the Bureau of Labor Statistics showed on Wednesday, rising 0.5 percent from December in what was the fastest monthly increase since August 2023. Last month, the annual pace was 2.9 percent.

“Core” C.P.I., which more closely reflects underlying inflation by removing volatile food and energy prices, also showed little improvement. It rose 0.4 percent from December or 3.3 percent on a year-over-year basis, both higher than economists expected. The monthly increase in core prices was the highest since April 2023.

The January data underscored the uneven nature of the central bank’s battle against high prices. Inflation has subsided drastically since cresting just above 9 percent in 2022, but progress in recent months has been much more sporadic.

Austan Goolsbee, president of the Federal Reserve Bank of Chicago, described the latest inflation report as “sobering.”

Mr. Goolsbee, who will cast an official vote on policy decisions these year, said he did not want to read too much into one inflation report, especially since it followed two months of more “encouraging” developments and noted that seasonal quirks were typical in January data. But he made clear that it was an unwelcome development.

“There’s no question, if we got multiple months like this, then the job is clearly not done,” he said in an interview.

Last month, price increases in sectors closely watched by consumers — from groceries to gasoline — offset declines in other categories like clothing and furniture.

Grocery prices climbed 0.5 percent compared with the previous month, or 1.9 percent on a yearly basis. That was driven in large part by a nationwide egg shortage caused by an outbreak of avian influenza, or bird flu, which has pushed prices up 15.2 percent over the past four weeks. Since last year, egg prices are up 53 percent. It was the largest monthly increase in egg prices since June 2015, accounting for roughly two-thirds of the total increase in grocery prices since December.

Gasoline prices also rose another 1.8 percent over the course of the month, although they are down 0.2 percent compared to the same time last year. Among other categories to increase were airline fares and hotel rates. Used cars and trucks as well as automobile insurance rose, with prices up about 2 percent from December.

Economists have closely watched for further improvements in housing-related costs, a slowdown that began to show up in the data at the end of last year. That progress stalled in January, with shelter prices increasing 0.4 percent over the month, or 4.4 percent on a year-over-year basis.

Jonathan Wright, a former Fed economist now at Johns Hopkins University, said the latest data “reinforces the picture of inflation getting stuck around 3 percent and that last percentage point becoming very difficult to achieve,” referring to the Fed’s 2 percent goal. He said a rate increase from the central bank is “at least as likely” as a rate cut in the near term.

Price pressures are persisting at a time of significant uncertainty about the outlook for the economy just weeks into President Trump’s second term in the White House. Tariffs, deportations, tax cuts and deregulation are expected to have an economic impact, but the final policy mix will determine whether economists and policymakers will pay more mind to the risk of resurgent inflation or an unexpected slowdown in growth.

“The risks are to higher inflation and lower growth,” said Alan Detmeister, a former Fed economist now at UBS, of Mr. Trump’s proposals. Much will depend on what is actually carried out, he added, saying that the economic outlook was “very uncertain.”

Republicans were quick to cast blame on the Biden administration for the recent rise in prices. Representative Jason Smith of Missouri, who heads the House Ways and Means Committee, said that the former president “failed to lower prices and left behind an inflation mess that President Trump is cleaning up.”

In a social media post after the report was released, Mr. Trump himself said, “BIDEN INFLATION UP!” That followed another missive earlier in the day, in which he called for interest rates to be lowered, saying it was “something which would go hand in hand with upcoming Tariffs!!!”

But the Fed has signaled little urgency to lower rates for the time being, setting up a potential clash with a president who showed in his first term a readiness to critique the central bank when it resisted his demands for cuts. After a percentage point worth of cuts in the final three months of last year, rates now hover between 4.25 percent and 4.5 percent.

Mr. Goolsbee said in the interview that he expected interest rates to settle a “fair bit below where we are today,” but further cuts would require “confidence that we are on path to 2 percent inflation.”

At least over a longer time horizon, households and businesses do not seem to be losing faith that inflation will eventually move lower — something Mr. Goolsbee said gave him “some comfort” because “the world views this as not a permanent shift and not an indication over an extended overheating of the economy.”

He expressed concern that Mr. Trump’s policies would make the Fed’s job more difficult in terms of extracting a signal from incoming data. If price pressures are being driven by supply shocks related to policies like tariffs, as opposed to strong consumer demand, for example, the central bank’s policy response may look different.

“We’re going to be in the uncomfortable situation of trying to distinguish what component of the increase in prices is coming from a thing that we should look through and what is a sign of overheating,” Mr. Goolsbee said.

Speaking to House lawmakers on Wednesday, Jerome H. Powell, the Fed chair, referenced the latest inflation data and said it showed that “we’re close, but not there on inflation.”

Mr. Powell said that while there has been “great progress” on bringing inflation down, “we’re not quite there yet, so we want to keep policy restrictive.”

Over two days of hearings, which began on Tuesday, his main message to lawmakers is that there is no urgency to lower interest rates. Officials at the central bank have in recent weeks suggested that so long as the labor market stays solid, they will need to see more substantive progress in inflation coming down before again pulling their policy lever.

John Williams, president of the Federal Reserve Bank of New York, said in a speech on Tuesday that he expected progress toward the 2 percent inflation goal to materialize, although he noted that it “will take time before we can achieve that target on a sustained basis.”

After the inflation report, traders in federal funds futures markets scaled back their bets about when the Fed would next lower interest rates, pushing back the timing from September to December. The worse-than-expected data sent U.S. stocks and government bonds tumbling.