Inflation Reaches 40-Year High in January

Consumer prices continued to accelerate in January due to higher food, electricity and housing costs. This was the largest year-over-year gain since February 1982. This higher-than-expected inflation may push the Federal Reserve to become more aggressive and raise the federal funds rate at a faster pace.

The Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) rose by 0.6% in January on a seasonally adjusted basis, the same increase in December. Excluding the volatile food and energy components, the “core” CPI increased by 0.6% in January, same increase in December. This is the seventh time in the last 10 months it has increased by at least 0.5%. Additionally, the price index for a broad set of energy sources rose by 0.9% in January, with an increase in electricity index (+4.2%) being partially offset by declines in the gasoline index (-0.8%) and the natural gas index (-0.5%). The food index increased by 0.9% in January as the index for food at home rose by 1.0%.

Most component indexes increased in January. The indexes for shelter (+0.3%), household furnishings and operations (+1.3%), used cars and trucks (+1.5%) showed sizeable monthly increases in January. The index for new vehicles remained unchanged over the month. Meanwhile, the indexes for lodging away from home (-3.9%) and wireless telephone services (-0.1%) declined in January.

The indexes for owners’ equivalent rent (OER) and rent of primary residence (RPR) increased by 0.4% and 0.5% over the month. Monthly increases in OER have averaged 0.4% over the last three months. More cost increases are coming from this category, which will add to inflationary forces in the months ahead.

During the past twelve months, on a not seasonally adjusted basis, the CPI rose by 7.5% in January, following a 7.0% increase in December. The “core” CPI increased by 6.0% over the past twelve months, following a 5.5% increase in December. It was the largest annual growth since February August 1982. The food index rose by 7.0% and the energy index rose by 27.0% over the past twelve months.

NAHB constructs a “real” rent index to indicate whether inflation in rents is faster or slower than overall inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster (slower) than overall inflation, the real rent index rises (declines). The real rent index is calculated by dividing the price index for rent by the core CPI (to exclude the volatile food and energy components).

The Real Rent Index stayed virtually unchanged in January, after a decrease of 0.2% in December.