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Inflation in January was higher than forecasted

MARY LOUISE KELLY, HOST:

Inflation came in hotter than expected last month. That suggests it might take longer for the Federal Reserve to start lowering interest rates. Nervous investors reacted to the inflation news today by selling off stocks. The Dow Jones Industrial Average tumbled more than 500 points. NPR's Scott Horsley is here with details from today's inflation report card. Hey, Scott.

SCOTT HORSLEY, BYLINE: Hi, Mary Louise.

KELLY: What happened? 'Cause forecasters were expecting a bigger drop in the inflation rate.

HORSLEY: Yeah, well, to be clear, the annual inflation rate did come down in January, but not as much as markets were hoping for. Gas prices were down last month - so was the price of clothing and used cars. But that was more than offset by rising prices for rent and food and especially services, like car repair and dry cleaning. Overall, the Labor Department said consumer prices were up 3.1% in January compared to last year. Now, that is a smaller annual increase than the month before, and it's way down from the nine-plus-percent inflation rate we saw a couple of years ago. But forecasters thought we would get a bigger break than we did last month. So in that sense, today's report was a bit of a disappointment.

KELLY: Well, this prompts me to go next then to what the Federal Reserve might do about it. Of course, the fed has been battling inflation with higher interest rates. Did we get some more insight on what their next move may be?

HORSLEY: Well, we may have to wait a little bit longer for that next move than a lot of people were hoping. You know, the central bank has pushed interest rates to their highest level in more than two decades in an effort to curb inflation, and Fed officials have said they're not going to start cutting those interest rates until they're confident that inflation is headed all the way back down to their target of 2%. Now, that probably means we're going to need to see less inflation on the services side. You can't have restaurant meals, for example, going up more than 5% a year like they did in the 12 months ending in January. Economist Michael Pugliese of Wells Fargo thinks we will start to see some easing in services inflation, but that's not what showed up in today's report.

MICHAEL PUGLIESE: As the year progresses, we're going to see more room on the services side. But you know, the upshot there is the Fed has made clear they need to see it - right? - not just project it, but see it. And they did not see it in this January reading.

HORSLEY: Instead, we saw service prices continuing to climb at a stubbornly fast pace. Investors took that as a sign that we're going to have to wait longer for a cut in interest rates, and that's why you saw that sharp selloff in the market today with the Dow falling about one and a third percent.

KELLY: And when you say we're going to have to wait longer for interest rates to be cut, what is the timetable?

HORSLEY: Well, the next fed meeting is in March, just about five weeks from now. And even before today's report, Fed Chairman Jerome Powell had warned that it was probably too soon for the Fed to start cutting rates at that meeting. A lot of investors had been pinning their hopes on a rate cut at the following meeting in May. That's still possible, although oddsmakers think it's less likely after today's inflation news. Pugliese still thinks the Fed might be ready to start cutting rates in May, although he admits the timing could slip to June or even later. Despite the big stock market reaction today, Pugliese calls this report just a pothole on the road to price stability - not a sign we're about to make a U-turn towards higher inflation.

PUGLIESE: It's not going to be a straight-line, linear path down, right? There's going to be bumps in the road on this sort of journey back to 2%.

HORSLEY: Of course, we've seen other bumps on this long, windy road. Inflation has proven unpredictable in both directions. One good sign is, even though prices rose more than expected in January, wages rose even faster. And that's been the case for about nine months now. So even with this higher inflation, the average worker is getting a real boost in his or her buying power.

KELLY: Thank you Scott.

HORSLEY: You're welcome.

KELLY: NPR's Scott Horsley. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.