US CPI data indicates a slowing trend in inflation

15 Feb 2023 , 08:32 AM

The U.S. consumer prices increased in January, but the increase was the smallest since late 2021, indicating that inflation is still slowing down and likely keeping the Federal Reserve on a course of gradual interest rate increases.

The consumer price index rose 0.5% last month after rising 0.1% in December, according to data released on Tuesday by the Labor Department. According to data from the U.S. Energy Information Administration, rising gasoline prices, which rose 3.6% in January, contributed to the increase in monthly inflation.

With the publication of the January report, the spending weights used to compute the CPI were also adjusted. The updated weights, which were released on Friday, are based on 2021 consumer spending.

The weight of housing in the CPI has now increased, but the weights of transportation and food have decreased. Some economists raised their CPI projections as a result of the adjustments, revised seasonal components, and new weights.

The Fed could continue raising rates at a gradual pace starting next month because inflation is declining.

The CPI rose 6.4% during the past 12 months to January. It came after a 6.5% increase in December and was the weakest gain since October 2021. The annual CPI increased by the most since November 1981, reaching a peak in June of 9.1%.

The easing of price pressures is due to both stronger supply chains and tighter monetary policy, which is putting pressure on demand. However, given the high cost of services and the tight labour market, it will be some time before inflation returns to the Fed’s 2% target. Since last March, the U.S. central bank has increased its policy rate by 450 basis points, from nearly zero to a range of 4.50%–4.75%, with the majority of the hikes occurring between May and December. 

According to economists, the Fed might increase this rate above the peak of 5.1% it predicted in December and hold it there for a while.

After increasing by 0.4% in December, the CPI grew by 0.4% when the volatile food and energy components were excluded. The so-called core CPI increased 5.6% in the 12 months that ended in January after increasing 5.7% in December.

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