People shop at a home improvement store in Brooklyn on January 25, 2024.
Spencer Platt | News Getty Images | Getty Images
Inflation eased in January and consumer purchasing power increased as price pressures on U.S. goods and services continued to ease.
The consumer price index, a key indicator of inflation, rose 3.1% in January 2024 from a year earlier, the U.S. Department of Labor said Tuesday. This is down from 3.4% in December.
The CPI measures how quickly the prices of everything from fruits and vegetables to haircuts to concert tickets and appliances change in the U.S. economy.
While the overall downward trend is encouraging, there was some “disappointment” beneath the surface as inflation rose from December to January in categories such as housing, food, electricity and airfares, said Mark Zandi, chief economist at Moody’s Analytics.
Ultimately, this is probably just a “brief deviation” from the broader disinflation trend, which is unlikely to move in a perfectly straight line, he added.
“There are zig zags in all this data, and this was just one zig zag,” Zandi said. “The bottom line is that inflation continues to moderate. It’s still uncomfortably high, though… it’s moving in the right direction. And all the trend lines still look good, aside from the deviation in today’s data.”
Workers’ salaries can buy more
Inflation has fallen significantly from its pandemic-era peak of 9.1% in June 2022. At that time, the average consumer’s paycheck couldn’t keep up with rapidly rising prices . Their so-called “real earnings” (earnings after accounting for inflation) have remained negative for more than two years.
This dynamic has reversed: workers’ hourly wages have exceeded the rate of inflation since May 2023. In other words, their wages can buy more. Real average hourly wages increased 1.4% between January 2023 and January 2024, the Labor Department said Tuesday.
Normalizing inflation means consumers don’t need to reduce their “excess savings” to support spending, according to a recent outlook compiled by JP Morgan’s Global Investment Strategy Group.
Consumer confidence jumped 13% in January, reaching its highest level since July 2021, reflecting “improvements in the outlook for both inflation and personal incomes,” according to the University of Michigan.
Where inflation was high in January
Cartons of orange juice on display in a grocery store in Los Angeles.
Mario Tama | Getty Images
Despite broad disinflation, there are specific categories where inflation remains relatively high.
According to the Department of Labor, “noteworthy” categories include automobile insurance (the costs of which increased 20.6% over the past year), recreation (2.8%), personal care (5.3 %) and medical assistance (1.1%).
Prices for motor vehicle insurance and auto repairs, for example, have risen rapidly following an earlier increase in new and used car prices during the pandemic era (albeit with a lag).
Additionally, residential housing inflation has increased by 6% over the past 12 months. Housing is the largest component of the average family’s budget, and persistently high inflation in the category has supported overall inflation data.
Economists expect housing inflation to moderate on encouraging signs, such as moderating national prices for newly signed leases, a trend that tends to take months to flow into broader inflation data.
“Everything suggests that this will happen,” Zandi said. “The delay is longer than I would have anticipated.”
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Other categories have retreated significantly.
Food inflation, for example, has fallen to 1.2% over the past 12 months, from a peak of around 13.5% in August 2022. Some categories, such as frozen juices and still drinks, sugar and steaks, however remain high. (Their prices increased by 29%, 7.2% and 10.7% respectively.)
Sugar prices, for example, have been affected by “ongoing shortages and availability issues” in 2023, said Amy Smith, an economist at Advanced Economic Solutions.
Sugar is a key ingredient in, among other things, juices and drinks; the latter were also affected by bad weather in Brazil and Florida, which reduced orange production and led orange juice (frozen concentrated orange juice) futures to rise to all-time highs in November, Smith said. And beef production fell nearly 5% last year, partly due to the impact of severe drought on rangelands, he added.
Meanwhile, overall energy costs have fallen (or deflated) by 4.6% over the past year, with gasoline falling by 6.4%, natural gas by 17.8% and fuel oil by 14.2%.
Why inflation has risen in the pandemic era
Inflation initially spiked in early 2021 as the U.S. economy reopened following the Covid-19-related shutdown.
Consumer demand for household goods increased as people spent more time at home and could not devote it to travel and other experiences. The production of goods has failed to keep up with strong demand amid struggling supply chains.
It was a “double whammy” that sent prices skyrocketing, according to Jay Bryson, chief economist at Wells Fargo Economics.
Now, supply chains and consumer demand for goods have largely normalized, Bryson said.
Inflation in the “services” sector of the economy – the intangible goods we consume, such as concerts, car repairs and veterinary visits – is also falling but remains high, he said. A key reason for this is wage growth, as labor is an important input cost for service businesses, economists said.
Business demand for workers rose to record levels as the economy reopened, and wage growth jumped to its highest level in decades as workers enjoyed broad leverage in the labor market. That growth has since moderated as the labor market has cooled from red-hot levels, reducing inflationary pressure on services, but it remains high, economists said.