Consumer Inflation Surges in January
Inflation exceeded expectations in January, driven by increased costs in food (notably eggs), energy, shelter, used vehicles and motor vehicle insurance. The headline Consumer Price Index (CPI) rose by 0.5% month-over-month and 3% year-over-year. When excluding food and energy, the Core CPI increased by 0.4% month-over-month and 3.3% year-over-year.
What’s the bottom line? The primary driver behind the persistent inflationary pressure is the shelter component, which makes up a substantial portion of the CPI at 35% of the headline figure and 44% of core CPI. This outsized influence means shelter costs play a crucial role in determining whether inflation continues to make progress lower.
January’s shelter reading of 4.4% year over year is higher than more real-time rental data from sources like Realtor.com, Apartment List, Zillow and CoreLogic of around 1.5% on a blended basis. Although there were indications that shelter costs were starting to align with the lower real-time numbers, January’s reading was unexpectedly high. Once CPI reporting begins to reflect this more real-time data, it may contribute to a decrease in inflation.
Wholesale Inflation Also Higher Than Anticipated
The Producer Price Index (PPI), which assesses wholesale price changes, increased by 0.4% in January from December, surpassing expectations, while the annual rate held steady at 3.5%. Excluding the volatile food and energy sectors, the Core PPI rose by 0.3% month-over-month, with the year-over-year rate slightly declining from 3.7% to 3.6%. Notably, December’s figures were revised upwards.
What’s the bottom line? PPI data is vital, as it influences the Personal Consumption Expenditures (PCE) index, the Federal Reserve’s preferred measure of inflation. Although the overall PPI was stronger than anticipated, a closer examination reveals declines in significant components such as healthcare and airline passenger services that affect PCE. This could indicate a more favorable PCE report set to be released on February 28, which would be positive news following the higher-than-expected Consumer Price Index (CPI).
Fed Signals Patience on Future Rate Cuts
In his Semiannual Monetary Policy Report to Congress, Fed Chair Jerome Powell acknowledged that while “inflation has eased significantly over the past two years, it remains somewhat elevated relative to our 2 percent longer-run goal.” He emphasized that the Fed does “not need to be in a hurry” to initiate further rate cuts.
What’s the bottom line? Adjustments to the Fed Funds Rate— the overnight rate banks use for interbank lending— are critical as they influence overall interest rates, even though they don’t directly correlate with mortgage or long-term rates.
The Fed started actively increasing the Fed Funds Rate in 2022 to address high post-pandemic inflation but began cutting rates last September in response to moderating inflation and a rise in unemployment. The decision to refrain from further cuts at the last meeting was influenced by slowing progress toward the 2% inflation target, as indicated by Core PCE metrics. Upcoming inflation data will be vital in determining the timeline for any additional rate adjustments this year.
Retail Sales Plummet
Following robust spending at the close of 2024, Retail Sales fell by 0.9% in January, significantly underperforming the -0.1% forecasts. The control group reading, which excludes autos, gasoline, building materials, and food services, also dropped by 0.8%. These figures represent the largest monthly decrease in two years, with spending declines observed in nine of the report’s 13 categories.
What’s the bottom line? While adverse weather conditions and severe fires in Los Angeles likely influenced the overall spending decline, they do not fully account for the nearly 2% drop in online sales. Additionally, outstanding credit card debt has reached an unprecedented $1.2 trillion, suggesting that January’s decreased spending may also stem from the necessity to manage post-holiday and other financial obligations.
Job Cuts Stay Minimal, but Job Seekers Encounter Obstacles
Initial Jobless Claims decreased modestly by 7,000, bringing the total to 213,000. Continuing Jobless Claims also fell by 36,000 to 1.85 million but remain elevated above 1.8 million for the thirty-sixth consecutive week.
What’s the bottom line? Overall, the data indicates that the unemployment situation remains unchanged, with layoffs contained but the labor market still facing challenges in getting job seekers back to work in a timely manner. Furthermore, as many individuals are eligible for benefits for only 26 weeks, the increase in Continuing Claims upon the expiration of these benefits highlights underlying weaknesses in the labor market.
Family Hack of the Week
Perfect for National Cherry Month, these Dried Cherry Scones from the Food Network yield 8 delicious treats.
Preheat the oven to 325 degrees Fahrenheit and grease a baking sheet. In a bowl, combine 2 cups flour, 1/3 cup sugar, 2 teaspoons baking powder, and 1/4 teaspoon salt. Cut in 1/3 cup of chilled, cubed butter using a pastry blender.
In a separate bowl, whisk together 1 egg, 2/3 cup whipping cream, 1 teaspoon vanilla extract, and 1 teaspoon almond extract. Fold the wet mixture into the dry ingredients until just combined, then fold in 1 cup of dried cherries.
Transfer the dough to a floured surface and knead gently for 4 to 5 turns. Flatten to 1/2-inch thickness and cut out circles. Brush the tops with an egg wash (1 egg mixed with 1 teaspoon water) and sprinkle with sugar and sliced almonds. Arrange the scones on the prepared baking sheet and bake for 15 to 18 minutes.
What to Look for This Week
Key housing reports to monitor include homebuilder confidence on Tuesday, new construction data on Wednesday, and Existing Home Sales on Friday. Additionally, the minutes from the Fed’s most recent meeting will be released on Wednesday, which could impact the markets.
Technical Picture
Mortgage Bonds experienced a rebound late last week, surpassing their 50-day Moving Average, which now acts as a support level. The next resistance hurdle is the dual ceiling created by the 100-day and 200-day Moving Averages, which may prove challenging to overcome. Meanwhile, the 10-year ended last week below its 50-day moving average, suggesting potential for further downward movement until reaching 4.40%.
