The report told a broadly familiar story. As has been the case for months, housing costs continue to make up the lion’s share of America’s inflation, while price increases in other categories such as gas and used cars ebb. And while Federal Reserve officials aren’t expected to make any rate decisions based on the January data alone, the report fit the bill for what officials are looking for: another month of assurance that inflation is gradually trending down.
The report comes as the Federal Reserve presses on in its fight to tame high prices — but the central bank already has plenty of success in the rearview mirror. After sprinting to hoist interest rates in 2022 and 2023, officials are entering a new phase: cutting borrowing costs multiple times this year. The message is that even though inflation hasn’t settled all the way down, the economy is stable enough for the Fed to take its foot off the brake.
Gradually, Americans’ feelings about the economy are improving, too. Consumer sentiment — a helpful glimpse into peoples’ moods — jumped 13 percent in January to its highest level since mid-2021, according to a closely watched survey by the University of Michigan. The S&P 500 stock index also set a new closing record on Friday, and it’s gained more than 5 percent in the first five weeks of the year. That could all be good news for President Biden, as the White House tries to sell its economic record ahead of the November election.
But for the Fed, the inflation fight isn’t over yet. A big reason is housing costs, which have been a driving force keeping inflation high for over a year. Tuesday’s report showed the shelter index — namely rent — accounted for more than two-thirds of the rise in inflation. Rent costs were also up 6.1 percent compared to one year ago.
Real-time data shows that rents on new leases are leveling off, and the construction of tens of thousands of new units should bring more relief to the market. Still, it’s clear that overall inflation — and peoples’ own budgets — won’t come back into better balance without more progress on the housing front.
Other categories saw increases, too, including car insurance and medical care. A narrower, closely watched measure of inflation that strips out volatile categories like food and energy rose 3.9 percent over the year before — still higher than normal, but consistent with the kind of progress Fed officials have seen over the past few months.
Meanwhile, costs for used cars and trucks, clothing and gas fell the most.
The January figures show remarkable progress since inflation soared to 40-year highs. Gas costs have fallen significantly since Russia’s invasion of Ukraine triggered a global energy crisis. Supply chains have cleared their backlogs, taming prices for refrigerators and rugs alike. And the labor market has kept growing, albeit at a more sustainable pace, helping cool the kind of blockbuster wage growth that can make inflation even worse.
Trying to quash price increases, the Fed has pushed interest rates to the highest level in more than two decades. Those aggressive moves were widely expected to yank the economy into a recession. But instead, employers have kept hiring, and consumers are still spending on everyday items and big-ticket purchases. All told, the economy continues to grow in ways that look more and more like a “soft landing” — an end to inflation without a painful economic contraction.
At a news conference last month, Fed Chair Jerome H. Powell stopped short of declaring success. But after six straight months of encouraging inflation news, Powell said officials’ confidence is building. The stronger that confidence gets, the easier it will be to start cutting rates.
“What do we want to see? We want to see more good data,” Powell said. “It’s not that we’re looking for better data. We’re looking at continuation of the good data that we’ve been seeing.”
Financial markets are eager for a definitive timeline of when the Fed will start trimming borrowing costs. So are many households and businesses, since lower rates filter down to all kinds of investments, such as car payments, mortgages and business loans.
For now, Powell has taken a cut at the Fed’s next meeting in March off the table. Odds seem to be growing for an initial cut in late spring or early summer, as long as no surprises threaten the economy in the meantime.
“I don’t want to put timing on it really,” Cleveland Fed President Loretta Mester told reporters earlier this month. “Later this year — if things evolve as anticipated — we would be able to start moving the rate down. I think that would be appropriate. But again, I don’t feel that there’s a sense of urgency here.”
