US January inflation at 6.4% as food and core inflation taper

15 Feb 2023 , 07:24 AM

Since then, the glide path of US inflation has been clearly lower and the YOY inflation has come in at 6.4% for January 2023. With the Fed being so aggressive on rate hikes and having hiked rates by 450 basis points, it is only obvious that inflation had to come down. Jerome Powell has remained hawkish but the quantum of rate hikes has been now cut from 75 bps to 50 bps and later to 25 bps. However, the guidance is still of 2 more rate hikes of 25 bps each; most likely in the first half of 2023. Fed has already raised rates by a full 450 basis points from the range of 0.00%-0.25% to 4.50%-4.75% since March 2022.

How US consumer inflation trended lower

One can say that the fall in inflation has not been in proportion to the spike in interest rates, but that is understandable. Consumer inflation in the US had touched a peak of 9.1% in June 2022. Since June, inflation tapered to 8.5%, 8.4%, 8.2%, 7.7%, 7.1%  and 6.5% between July 2022 and December 2022. January 2023 saw a marginal fall in consumer inflation by another 100 bps to 6.4%. If one looks at the break-up of consumer inflation in January 2023, food and core inflation is down but energy inflation is up on yoy basis. 

Broadly, the yoy inflation was lower across food inflation and core inflation; but higher for energy inflation in 2022. The Russian energy crisis has resulted in a supply crunch and the price of oil and gas has again shot up in the US. For instance, Food inflation fell by 30 bps from 10.4% to 10.1%. During the same period, energy inflation spiked by 140 basis points from 7.3% to 8.7%. Core inflation tapered another 100 bps from 5.7% to 5.6%. Over last 4 months, core inflation fell 100 bps from 6.6% to 5.6%; a good structural signal overall.

US consumer inflation down 270 bps from June 2022 peak

Headline consumer inflation in the US has fallen 270 basis points from the peak of June 2022. However, the cumulative impact of rate hikes and the lag effect will translate into a sharper fall in consumer inflation in coming months. Food inflation and core inflation trended lower while energy inflation was higher. With the rates already 225 bps above the neutral rate, we could see a multiplier impact on inflation in the coming months.

In our previous report, we had written that post-COVID relaxations in China, the total EU ban on Russian oil and other supply constraints could prop up oil prices. OPEC is also trying to keep Brent Crude prices in the range of $90-$100/bbl. All these factors combined to push up the energy inflation by 140 basis points in January 2023.

Inflation Basket Category	Jan 2023 (YOY)	Dec 2022 (YOY)	Inflation Basket Category	Jan 2023 (YOY)	Dec 2022 (YOY)
Food Inflation	10.10%	10.40%	Core Inflation	5.60%	5.70%
Food at home	11.30%	11.80%	Commodities less food and energy	1.40%	2.10%
Cereals and bakery products	15.60%	16.10%	Apparel	3.10%	2.90%
Meats, poultry, fish, and eggs	8.10%	7.70%	New vehicles	5.80%	5.90%
Dairy and related products	14.00%	15.30%	Used cars and trucks	-11.60%	-8.80%
Fruits and vegetables	7.20%	8.40%	Medical care commodities	3.40%	3.20%
Non-alcoholic beverages	13.10%	12.60%	Alcoholic beverages	5.80%	5.80%
Other food at home	13.20%	13.90%	Tobacco and smoking products	6.30%	5.50%
Food away from home	8.20%	8.3%	Services less energy services	7.50%	7.00%
Full service meals and snacks	8.10%	8.20%	Shelter	7.90%	7.50%
Limited service meals	6.70%	6.60%	Rent of primary residence	8.60%	8.30%
Energy Inflation	8.70%	7.30%	Owners’ equivalent rent	7.80%	7.50%
Energy commodities	2.80%	0.40%	Medical Care Services	3.00%	4.10%
Fuel oil	27.70%	41.50%	Physician Services	1.70%	1.70%
Gasoline (all types)	1.50%	-1.50%	Hospital Services	3.60%	4.40%
Energy services	15.60%	15.60%	Transport Services	14.60%	14.60%
Electricity	11.90%	14.30%	Motor vehicle Maintenance	14.20%	13.00%
Natural gas (piped)	26.70%	19.30%	Motor vehicle insurance	14.70%	14.20%
Headline Consumer Inflation	6.40%	6.50%	Airline Fare	25.60%	28.50%

Data Source: US Bureau of Labour Statistics

There are a few broad trends emerging in the yoy inflation front. Firstly, food inflation has fallen on a yoy basis, but certain categories have experienced inflation. For example, meat & poultry and non-alcoholic beverages are experiencing higher inflation. Under the energy category, the 140 bps spike in inflation has been largely triggered by gasoline and natural gas, even as electricity and fuel oil prices have remained lower. On the core inflation front, used cars dipped deeper into negative while core inflation was lower across rentals, medical care, hospital care and airline fares. However, pressure on core inflation came from tobacco products and motor vehicle maintenance costs.

High frequency consumer inflation sharply positive in January 2023

The US Bureau of Labour Statistics (BLS) reports inflation on a yoy basis, and on MOM high frequency basis. After touching a high of 1.2% in June, it fell to 0.0% in July 2022. While MOM inflation spiked in September and October, it had moderated in November 2022 and December 2022. However, January 2023 has seen MOM inflation spike, led by food products inflation.

Here are key takeaways from the MOM inflation data for January 2023.

1. MOM food inflation increased 0.5% with 4 out of 6 heads of groceries up. Inflation was higher for meat, fish, poultry, cereals and eggs but lower for vegetable and fruits.

    

2. Energy index rose 2.0% MOM in January 2023 led by gasoline, natural gas and electricity prices. Short term energy pressure is up across the board.

    

3. Core inflation rose 0.4% MOM in January 2023. Pressure is coming from services even as the goods are driving core inflation flat to lower.

 

Fed will not give up hawkishness in a hurry

Fed has already hiked rates by 450 bps and headline consumer inflation is down 270 bps. Here is what one can expect from the Fed in coming months.

1. Fed is now expected to hike rates by another 50 bps in 2023, which would most likely happen in 2 tranches of 25 basis points each after the 25 bps rate hikes in February 2023. This is substantially factored in.

    

2. Fed minutes have already underlined there would not be any rate cuts in 2023 and the first rate cuts may be possible only in year 2024. Due to strong labour data, the Fed may not relent on rate hikes till the inflation shows a steady course direction towards 2%.

    

3. The X-factor is inflation guidance, with too many open ended questions. The opening of the Chinese economy could spike inflation. Secondly, the OPEC will still try to constrict supply, and the EU ban on Russia could add to the supply shortfall in the global market. Amidst these trends, a global oil and gas shortage is also expected in 2023, which could exacerbate the oil situation further and boost inflation.

    

4. Finally, what does this mean for India? RBI, as of now, is in sync with the US economy on rates. With inflation falling in India and the US, India does not have to worry about risk-off flows. The US and the Indian central banks may converge towards a growth oriented monetary policy later in 2024. For now, it will be about inflation control only.