The CPI inflation report for January came in much hotter than expected, but there were enough oddities in the details to argue for a more balanced interpretation. First, the bad news: overall prices rose 0.5% m/m, with core prices (excluding food and energy) up 0.4% m/m. This lifted the two respective inflation rates by a tenth each to 3.0% y/y and 3.3% y/y. The market’s response was sharp and swift, with 10-year yields up nearly 15 basis points immediately following the release.
But the details told a more nuanced story. Food prices rose 0.4% m/m, with food at home up 0.5%. There were no obvious outliers aside from the surge in egg prices amid avian flu-related shortages. Energy, however, surprised meaningfully to the upside with a 1.1% monthly gain; cold weather, natural disasters, and seemingly lingering seasonal effects all played a role. New car prices were flat but used car prices jumped 2.2%. On a y/y basis, used car prices have now essentially caught up with changes in the Manheim auction price series, so unless the latter steps up from here, monthly increases of this magnitude in used car CPI are unlikely. Motor vehicle insurance also reaccelerated following a couple of tamer reads: insurance costs jumped 2.0% m/m, the most since March 2024. Notably, parking fees surged 6.4% m/m, suggesting a start of year price hike that may or may not have been exacerbated by seasonal effects. Given the y/y gain is just 4.8%, the January increase appears disproportionate and indicative of seasonal effect distortions; but stricter return to office mandates are also creating more demand so the effects could be more lasting. In recreation services, seasonal effects likely made the data look worse than it was: the outsized increases across several categories were hard to explain. Medical services offered a favorable counterpoint. The shelter component was OK. Overall shelter costs increased 0.4% m/m, but rent of primary residence matched December’s 0.3% rise. Lodging away from home posted a big 1.4% m/m gain, but that seems bound to ease.
The slow but steady moderation in rent of shelter inflation (from 6.1% y/y in January 2024 to 4.4% in January 2025) is an important reminder that there is a lot more to US inflation than just goods and tariffs. The producer price inflation data reinforced that point. Despite an upside surprise on the headline, PPI components used in the calculation of PCE (personal consumption expenditure) inflation were on the soft side. We’ve been making the point for a while now that, even with an elevated January gain, the y/y increase in core PCE inflation is bound to moderate by two tenths to 2.6% y/y. That remains our forecast, but the PPI release opens the door to a three tenth decline to 2.5% y/y. Any retreat would be good news insofar as it would mark the first y/y improvement in this inflation metric (the Fed’s preferred measure) since June. If not for tariffs, this could have kept March as a live meeting for a cut.
The notable miss in retail sales was another reminder that the FOMC needs to weigh both inflation and growth risks. Nominal sales dropped 0.9% m/m, although a little of this sting was offset by an upward revision. However, control sales (excluding food, gas, building materials, and dollar stores) dropped 0.8%, practically unwinding December’s gain. Wildfires and cold weather weighed on these results, but it remains to be seen how durable the rebound will be given likely hit to consumer confidence from tariffs and return to office requirements for federal employees.
