Upcoming Events
Wednesday, February 21
FOMC Meeting Minutes Release
Bowman Speaks at Exchequer Club Luncheon
Thursday, February 22
Jefferson Speaks at Peterson Institute for International Economics
Cook Speaks at Julis-Rabinowitz Center for Public Policy & Finance
Waller Speaks at Notre Dame Club of Minnesota and University of St. Thomas Finding Forward Speaker Series
Recent News
What’s up with inflation… The Consumer Price Index (CPI) grew at a continuously-compounding annual rate of 3.7 percent in January, according to the latest data from the Bureau of Labor Statistics. Consumer prices have grown at an annualized rate of 2.8 percent over the last three months and 3.3 percent over the last six months.
Core inflation, which excludes volatile food and energy prices, also picked up. Core CPI grew at a continuously-compounding annual rate of 4.7 percent in January, after growing at an annualized rate of 3.3 percent in December and 3.7 percent in November.
Does the January uptick portend a return of high inflation? Maybe. But there are at least two reasons to be skeptical.
First, the increase in inflation was largely driven by a surge in shelter prices. The CPI’s shelter component, which includes actual and owners' equivalent rents, grew at an annualized rate of 7.6 percent in January. Shelter accounts for around 36 percent of the CPI’s basket—and around 45 percent core CPI. But changes in CPI’s shelter component tend to lag, meaning the most recent shelter data probably tells us more about how prices changed months ago than how prices are changing now.
Second, the usual seasonal adjustment for January may be insufficient for January 2024. Many prices reset in January, as contracts are renewed at the start of the year. To prevent a spike in CPI inflation each January, the BLS adjusts the data to account for the typical January price increase. This procedure essentially apportions some of the increase in January prices to other months, as if the prices had grown gradually from one month to the next instead of suddenly each January.
Seasonally-adjusting price level data works pretty well in normal times. But, in unusual circumstances, the seasonal adjustment may result in “‘bad’ CPI readings,” as Robin Brooks explains.
When prices are rising faster than usual, the seasonal adjustment—which accounts for the usual increase in prices—will not apportion enough of the January price increases to other months. Consequently, the seasonally-adjusted price level will tend to overstate inflation in January (and understate inflation in other months).
Brooks describes the January 2024 uptick as “an echo of last year's start-of-year price resets that made inflation in early 2023 look much worse than it really was.” In January 2023, the CPI grew at a continuously-compounding annual rate of 6.2 percent. It had grown at an annualized rate of 3.3 percent over the prior three months and would grow at an annualized rate of 3.5 percent over the subsequent three months. In hindsight, January 2023 was an outlier. January 2024 looks likely to be an outlier, as well.
Survey says… Consumers do not expect a return of high inflation. The latest survey from the New York Fed shows that the median consumer continues to expect around 3.0 percent inflation over the next year and 2.5 percent inflation over the next five years. Inflation expectations declined from 2.6 percent to 2.4 percent over the three-year-ahead horizon.
Production… Industrial production decreased 0.1 percent in January 2024, new data from the Fed show. Industrial production is 1.2 percent higher than it was in January 2020, just prior to the pandemic, but unchanged from its year-earlier level.
Capacity utilization was 78.5 percent in January 2024, down 0.2 percentage points from the prior month. It is 1.1 percentage points below its long-run average.
More broadly, production is expected to be strong in the early months of 2024. The Atlanta Fed’s GDPNow model currently estimates real Gross Domestic Product will grow at an annualized rate of 2.9 percent in Q1-2024. Real GDP grew 2.5 percent in 2023.