New inflation data released on Wednesday showed consumer prices in January rose more than expected, complicating the Federal Reserve’s strategy for managing inflation. The increase was driven by surging costs for eggs and energy, as well as a reversal in core prices from the previous month’s easing.
The latest figures from the Bureau of Labor Statistics (BLS) revealed that the Consumer Price Index (CPI) increased 3% year-over-year in January, up from December’s 2.9% gain. Month-over-month, the CPI rose 0.5%, the largest monthly increase since August 2023, and slightly higher than December’s 0.4% rise. Economists had projected a 0.3% increase.
Seasonal factors, such as rising fuel costs and persistent food inflation, kept overall prices elevated. Notably, the price of eggs surged 15.2%, marking the largest monthly increase since June 2015, accounting for nearly two-thirds of the total food-at-home inflation. On an annual basis, egg prices jumped 53%.
Excluding the volatile categories of food and energy, core CPI rose 0.4% in January, surpassing the 0.2% increase seen in December and marking the largest monthly gain since April 2023. Year-over-year, core prices rose 3.3%, up from 3.2% in December, which had marked the first deceleration in core CPI since July 2023.
Core inflation continues to be driven by persistent costs in housing and services, including insurance and medical care. However, shelter costs showed signs of easing, rising 4.4% on an annual basis—the smallest 12-month increase in three years. Similarly, rent inflation reached its lowest level since February 2022.
Used-car prices, however, continued to climb, posting a 2.2% increase in January following a 1.2% rise in December. This contributed to the overall increase in core goods, which reached its highest level since May 2023.
While inflation has slowed, it remains well above the Federal Reserve’s 2% target, leading economists and central bank officials to predict a “bumpy” road ahead.
“This is not a good print,” Claudia Sahm, chief economist at New Century Advisors and former Federal Reserve economist, told Yahoo Finance. She added that while January has historically seen unexpected surges, such months have typically been outliers that dissipate as the year progresses. Still, Sahm noted that it was a disappointing start to the year.
Seema Shah, chief global strategist at Principal Asset Management, echoed this sentiment, suggesting that seasonal factors and one-off issues may have contributed to the unexpected rise. However, she also noted that stronger-than-expected earnings growth and rising inflation in certain services might indicate that inflation expectations are set to persist.
The inflation outlook is further complicated by the policies of former President Donald Trump. Economists warn that his protectionist trade stance could drive inflation higher, especially with the upcoming tariffs on steel and aluminum imports set to take effect in March, as well as planned tariffs on Mexico, Canada, and China.
Following the release of the inflation data, traders adjusted their expectations, scaling back predictions of an immediate Fed rate cut. Stock markets initially dipped before recovering by mid-afternoon.
“The Fed is never going to overreact to one month of data,” Sahm remarked. “They’ve been clear since December that they are in no rush to change rates again, and this report will only reinforce that stance.” She emphasized that the Fed would need to see sustained improvement in inflation data over the coming months, likely pushing the timeline for any action into the second half of the year.
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