Higher-than-expected inflation last month could mean that interest rates will continue to climb higher.
Key Details
- Consumer prices continued to rise in January, indicating that the fight against inflation isn’t over quite yet.
- The annual inflation rate reached 6.4%—higher than economists had predicted.
- As the job market remains strong, the Federal Reserve may continue to drive up interest rates to slow the economy.
- Traders expect the Federal Reserve to increase interest rates at least three times before the end of June.
Why it’s news
Many had hoped that the Fed would continue to reduce the severity of its rate hikes—going with 25-basis-point hikes in the next rounds of raising. Now Wall Street analysts fear the Fed may revert to 50-basis-point hikes, or at least continue raising rates into next year.
In addition to the labor market, the Fed is monitoring the cost of services besides housing and energy. This category covers everything from gym memberships to nail salons.
Though inflation increased more than expected at the beginning of the year, economists still anticipate that it will slow by the end of this year, Bloomberg reports. Some economists predict that the U.S. must enter a recession in order to prompt this slowdown, but others argue that a soft landing is still possible.
Inflation is at 6.4%, lower than the 9% peak from last year. Those who predict inflation will fall this year are monitoring the housing market. Housing prices were the most significant cause of growth in the consumer-price index.
The Fed has been hiking interest rates to slow the economy and cut back on consumer spending, but the market has remained strong so far. The U.S. unemployment rate is 3.4%, and consumer spending has remained steady, though it has weakened somewhat.
Backing up a bit
A Thursday report from the Commerce Department revealed that consumer spending declined in November even further than projected. Sales dropped 0.6% last month, lower than the estimated 0.3% drop the Dow Jones had predicted. This marks the largest drop in retail sales in a year.
The decline was across multiple categories, including furniture, which fell by 2.5%, building materials declined by 2.5%, and auto parts dropped by 2.3%. Online sales also saw a decline of 0.9%. Bars, restaurants, and food and beverage stores saw a nearly 0.9% increase.
Though spending is beginning to decline, fewer unemployment claims were filed during the same time period. Weekly claims fell by 20,000.