‘Unsettling’: Inflation Accelerates Sharply to 3 Times Pace in Prior Month

People shop for bread at a supermarket in Monterey Park, Calif., on Oct. 19, 2022. Frederic J. Brown/AFP via Getty Images

Inflation accelerated sharply and more than expected in January to three times the pace logged in the prior month, suggesting the Federal Reserve’s fight to quell price pressures will be, in the words of one market analyst, “long and bumpy.”

Prices rose by 0.6 percent month-over-month in January, as measured by the Personal Consumption Expenditures (PCE) measure, released on Feb. 24 by the Bureau of Economic Analysis (BEA).

That pace of inflation is three times higher than last month’s 0.2 percent rate and above Wall Street estimates of 0.5 percent.

In annual terms, inflation in January came in at 5.4 percent, faster than last month’s 5.3 percent pace and well above market forecasts for 4.9 percent.

At the same time, the PCE inflation readings that strip out the volatile categories of food and energy and are known as the “core” measure, also accelerated sharply.

The month-over-month pace was 0.6 percent in January, faster than December’s 0.4 percent pace. Wall Street analysts had called for a slower 0.4 percent of the core measure.

In annual terms, core inflation in January hit 4.7 percent, up from the prior month’s 4.6 percent and above consensus estimates of 4.3 percent.

The annualized core inflation reading is the one the Federal Reserve pays particularly close attention to when calibrating monetary policy and interest rates. At 4.7 percent, it’s far above the Fed’s target of 2 percent.

Investor reaction to the news was immediate, sending Wall Street’s three main stock averages down in futures trading by over 1 percent.

‘Unsettling’

Experts said the hot inflation print means the Fed is likely to continue on its aggressive path of rate hikes as price pressures remain stubbornly high.

“The path to lower inflation will likely be long and bumpy,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research, in a statement on social media.

Allianz chief economic adviser and noted economist Mohamed El-Erian took to Twitter to comment on the hot inflation data, calling the numbers “unsettling.”

With the core measure appearing “sticky” and the headline figure “going the wrong way,” El-Erian said the inflation print is “worrisome news for the economy, livelihoods, and markets.”

Jason Furman, an Obama-era chair of the Council of Economic Advisers, said in a statement the data shows that the economy is “very overheated” and that “little if any progress on inflation” has been made.

“Supply chains unfreezing were supposed to bring down inflation,” he continued. “They didn’t.”

One of the mantras of the “transitory” inflation camp, which includes many members of the Biden administration and the Fed, was that inflation was temporary and mostly caused by supply chain dislocations, and as these got ironed out price pressures would ease.

While recent data from the latest Purchasing Managers’ Index (PMI) showed that supply chain disruptions showed signs of easing, the report also showed inflation pressures building.

Average prices for both goods and services rose in February at the fastest pace since last October, the PMI data showed.

Forces Going Higher

While easing rent prices—which show up in the data with a lag—will help bring down the pace of inflation going forward, Furman argued “there are still forces going in the direction of high inflation,” including continued labor market tightness.

Six percent inflation “is much more likely than 2%,” he wrote, while calling for a jumbo 50-basis-point interest hike at the Fed’s upcoming policy meeting and a terminal rate of around 6 percent.

Fed officials have signaled that rates would go as high as around 5.5 percent in recent statements. Currently, the Fed Funds rate is in a target range of 4.5–4.75 percent.

Cleveland Federal Reserve President Loretta Mester said Friday that interest rates would likely need to keep moving higher in order to bring inflation down to tolerable levels.

“I see that we’re going to have to bring interest rates above 5 percent,” she told CNBC’s “Squawk Box” in an interview.

“We’ll figure out how much above. That’s going to depend on how the economy evolves over time. But I do think we have to be somewhat above 5 percent and hold there for a time in order to get inflation on a sustainable downward path to 2 percent.”

Mester made headlines recently when she disclosed the fact that she was among a small group of Fed officials who had argued for a bigger 50-basis-point rate hike at the latest policy meeting, which concluded with a vote to raise rates by a more modest 25 basis points.

‘Uncertainties’ in Inflation Outlook

Minutes from the latest Federal Open Market Committee (FOMC) policy meeting revealed that the policy-making arm of the central bank believes there are “notable uncertainties ahead,” including the potential for persistent inflation and a sharper economic contraction.

“Participants noted that inflation data received over the past three months showed a welcome reduction in the monthly pace of price increases, but stressed that substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path,” the minutes stated.

A number of FOMC members expect “subdued growth or a mild recession” but they acknowledged the possibility of a “deeper downturn.”

Some, like Mester, argued for a sharper 50-basis point rate hike, though in a unanimous decision they opted for a smaller 0.25 percentage point increase.