By Lucia Mutikani
WASHINGTON (Reuters) - U.S. consumer prices rose more than expected in January amid a surge in the cost of rental housing, but the pick-up in inflation did not change expectations the Federal Reserve will start cutting interest rates in the first half of this year.
The increase in prices reported by the Labor Department on Tuesday was the largest in four months and occurred against the backdrop of labor market strength and economic resilience. But January is typically a strong month for inflation readings as businesses push through prices increases at the start of the year, which some economists believed were not completely addressed by the model used by the government to strip out seasonal fluctuations from the data.
They also pointed out that not all the drivers of inflation last month would go into the calculation of the personal consumption expenditures (PCE) price indexes, the measures tracked by the U.S. central bank to gauge progress toward its 2% inflation target.
Inflation is slowing, but probably not fast enough to encourage Fed officials to start easing rates soon.
"It's important not to overreact and jump to the assumption that an inflationary resurgence is developing," said Seema Shah, chief global strategist at Principal Asset Management. "Inflation was partially driven by segments that are less important for the Fed's favored core PCE measure, while forward looking indicators suggest they will ease over the coming months."
The consumer price index (CPI) increased 0.3% last month after gaining 0.2% in December, the Labor Department's Bureau of Labor Statistics said. Shelter, which includes rents, accounted for more than two-thirds of the rise in the CPI.
Food prices rose 0.4%, the most in a year, which was partly blamed on winter storms. Grocery food inflation also increased 0.4%, the largest gain since January 2023, boosted by more expensive sugar and sweets as well as fats and oils, fruits and vegetables.
Prices for nonalcoholic beverages shot up 1.2%. But cereals and bakery products were cheaper. Prices for meat, eggs and fish were unchanged. Gasoline prices dropped 3.3%.
In the 12 months through January, the CPI increased 3.1% after advancing 3.4% in December. Economists polled by Reuters had forecast the CPI would gain 0.2% on the month and rise 2.9% on a year-on-year basis. The annual increase in consumer prices has moderated from a peak of 9.1% in June 2022.
Annual revisions to the CPI data published last Friday generally showed inflation on a downward trend after surging in 2022. Inflation is one of the key campaign issues in the Nov. 5 U.S. presidential election.
President Joe Biden in a statement focused on the moderation in annual inflation, but acknowledged that "we know there's still work to do to lower costs."
Financial markets pushed back their interest rate-cut expectations to June from May after the release of the CPI report.
Stocks on Wall Street were trading lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.
NO RUSH TO CUT RATES
Policymakers have said they are in no hurry to start lowering borrowing costs and want convincing evidence that inflation is on a sustained slow path. Since March 2022, the Fed has raised its policy rate by 525 basis points to the current 5.25%-5.50% range.
Excluding volatile food and energy components, the CPI rose 0.4% last month. That was the largest advance since last May and followed a 0.3% increase in December. The so-called core CPI was boosted by a 0.6% surge in shelter after gaining 0.4% in December. Owners' equivalent rent (OER), a measure of the amount homeowners would pay to rent or would earn from renting their property, jumped 0.6%. That was the biggest increase in nine months and followed a 0.4% rise in December.
New weights published last week increased housing's share and trimmed that of new and used cars. Those were used to calculate the January CPI data, together with updated seasonal factors. Rental inflation has remained elevated despite evidence that the price of rent demands is going down.
Rent measures in the CPI tend to lag the independent gauges by several months. There is also a large stock of apartment buildings in the pipeline, adding to economists' expectations that rents will lead inflation lower this year.
Economists believe OER's slightly bigger share in the CPI will contribute to lower inflation readings this year, if the official rent measures start to align with the private gauges, as expected.
Prices for hotel and motel rooms rebounded as did those for airline fares in January. Motor vehicle insurance prices increased further. Medical care services increased 0.7%, with the cost of hospital services surging 1.6%, the most since October 2015. The cost of health insurance rose solidly, but prescription medication prices recorded their biggest decline since February 2021.
Medical care services in the CPI do not go into the calculation of the PCE price indexes.
"January is often subject to seasonal-adjustment-busting one-time price increases, especially in services, so this is less a red flag as a watch-this-space sort of thing," said Mark Streiber, an economic analyst at FHN Financial in New York.
Services inflation jumped 0.7%, the biggest gain in a year, after advancing 0.4% in December. Excluding rental shelter, services rose 0.6%, also the largest increase since January 2023, after gaining 0.4%.
Used car and truck prices dropped 3.4%, the largest decrease since May 1969. Apparel prices fell by the most in nearly three years. Goods prices dropped 0.3% after being unchanged in December. The core CPI advanced 3.9% on a year-on-year basis, matching December's increase.
With the CPI data in hand, economists estimated the core PCE price index increased 0.3% in January after gaining 0.2% in December. Core inflation is forecast to rise 2.7% on a year-on-year basis after increasing 2.9% in December.
These estimates could change depending on the outcome of producer price data for January, which is due to be released on Friday.
"The good news is that the economy at large remains resilient, and we think the precise timing of cuts to come, whether that be in May, June or July, matters less than the direction," said Elyse Ausenbaugh, global investment strategist at J.P. Morgan Global Wealth Management.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Andrea Ricci and Paul Simao)