Goods versus services

Headline consumer inflation fell less than expected in January. After rising unexpectedly in December, from 3.1% to 3.4%, the CPI fell back to 3.1% in January, above market expectations for a 2.9% increase. As has been the case lately, markets reacted sharply, selling both stocks and bonds, and virtually extinguishing hopes of a March Federal Reserve rate cut. 

Digging into the inflation report reveals the good news that prices of core goods fell for the eighth consecutive month, by 0.3% in January, but core services prices rose 0.7%, the largest increase since September 2022, led by shelter costs. Medical care services and transportation services (airfares) prices both rose more than expected, and food prices accelerated from 0.2% gain in December to 0.4% in January. Shelter prices should begin to slow, following home prices and helped by recent building in rental units. 

Much weaker than expected January retail sales cast doubt on the strength of the consumer. Retail sales fell 0.8%, after a gain of 0.4% in December, as nearly all categories saw declines. Furniture, food and beverage, department store and eating and drinking establishment sales posted small gains. Partly offsetting this cold shower were continued low weekly jobless claims, which fell 8,000, to 212,000 new claims, and improved regional manufacturing surveys in both Philadelphia and New York. 

With a lot of economic data to digest, markets had moved past the CPI hiccup by week’s end. A rate cut at the March 20 meeting still seems unlikely, but the Fed remains data dependent.