US consumer prices post largest increase in nearly 1-1/2 years in January

US consumer prices increased by the most in nearly 1-1/2 years in January, with Americans facing higher costs for housing and food, reinforcing the Federal Reserve's message that it was in no rush to resume cutting interest rates amid growing uncertainty over the economy.

The hotter-than-expected inflation reported by the Labor Department on Wednesday was likely partly due to businesses raising prices at the start of the year. However, the surge in prices offered a cautionary note to President Donald Trump's push for tariffs on imported goods, which have been panned by economists as inflationary.

Trump was elected on promises to lower prices for inflation-weary consumers. High inflation could imperil the Trump administration's agenda, including tax cuts, which could overstimulate a healthy economy, and mass deportations of undocumented immigrants that are seen causing labor shortages and raising costs such as wages for businesses.

"With President Trump threatening to impose wide-ranging inflationary tariffs, the Fed won't resume cutting interest rates this year," said Paul Ashworth, chief North America economist at Capital Economics.

The consumer price index jumped 0.5 per cent last month, the biggest gain since August 2023, after rising 0.4 per cent in December, the Labor Department's Bureau of Labor Statistics (BLS) said. Shelter, which includes rents, increased 0.4 per cent and accounted for nearly 30 per cent of the rise in the CPI. That followed two straight monthly gains of 0.3 per cent.

Food prices rose 0.4 per cent after increasing 0.3 per cent in December. Grocery store prices surged 0.5 per cent, with the cost of eggs soaring 15.2 per cent, the largest increase since June 2015. That accounted for about two-thirds of the rise in prices at the supermarket. An avian flu outbreak has caused a shortage of eggs, driving up prices.

Prices also rose for meats, poultry and fish as well as for nonalcoholic beverages and dairy products. Gasoline prices rose 1.8 per cent while natural gas cost 1.8 per cent more, but electricity prices were unchanged.

In the 12 months through January, the CPI increased 3.0 per cent after advancing 2.9 per cent in December. Economists polled by Reuters had forecast the CPI gaining 0.3 per cent and rising 2.9 per cent year-on-year.

The BLS updated weights and seasonal adjustment factors, the model that the government uses to strip out seasonal fluctuations from the data to reflect price movements in 2024.

Some of the rise in the CPI last month probably reflected businesses pushing through price increases at the start of the year. Businesses could also have preemptively raised prices in anticipation of higher and broad tariffs on imported goods.

Trump early this month suspended a highly telegraphed 25 per cent tariff on goods from Canada and Mexico until March. But a 10 per cent additional tariff on Chinese goods went into effect this month. Economists expect that those tariffs, when they are eventually enforced, will lift inflation.

Fed Chair Jerome Powell told lawmakers on Tuesday that "inflation moderated a little further last year," adding that "recent progress has been bumpy."

Inflation remains above the US central bank's 2.0 per cent target.

The dollar gained versus a basket of currencies. US Treasury yields rose.

A line chart titled "Annual change in US Consumer Price Index" that compares two key inflation metrics over the past five years.

A line chart titled "Annual change in US Consumer Price Index" that compares two key inflation metrics over the past five years.

RATE CUT HOPES DIMINISHING

Chances of a rate cut this year are diminishing amid rising uncertainty over the economic impact of the Trump administration's trade, immigration and fiscal policies.

Consumers' one-year inflation expectations surged to a 15-month high in early February as households perceived that "it may be too late to avoid the negative impact of tariff policy," a University of Michigan survey of consumers showed last week.

Combined with a stable labor market, Bank of America Securities continues to believe that the Fed policy easing cycle is over. The central bank left its benchmark overnight interest rate unchanged in the 4.25 per cent -4.50 per cent range in January, having reduced it by 100 basis points since September, when it embarked on its policy easing cycle.

The policy rate was hiked by 5.25 percentage points in 2022 and 2023 to tame inflation.

Excluding the volatile food and energy components, the CPI climbed 0.4 per cent in January. The so-called core CPI increased 0.2 per cent in December. The core CPI has tended to print higher in January, which economists said suggested that seasonal effects lingered in the data even after seasonal adjustment.

Shelter costs increased 0.4 per cent, with owners' equivalent rent rising 0.3 per cent as did rents. Healthcare costs climbed 0.2 per cent, while prescription medication prices jumped 2.5 per cent and hospital services increased 0.9 per cent. The cost of motor vehicle insurance soared 2.0 per cent.

There were also increases in the prices of recreation, used cars and trucks, communication, airline fares and education. But apparel prices dropped 1.4 per cent.

In the 12 months through January, the core CPI rose 3.3 per cent after advancing 3.2 per cent in December.