Inflation is likely to have eased for the seventh month in January on the back of Fed rate hikes

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Inflation eased for what is likely a seventh straight month in January, but interest rates will continue to rise – as the Federal Reserve’s campaign to squeeze unusually high prices out of the economy is not over.

Data released Tuesday morning by the Bureau of Labor Statistics is said to show prices rose about 6.2 percent in January from a year earlier. That would be a fall from the 6.5 percent interest rate recorded in December and a fall from last summer’s peak of 9.1 percent. Economists expect the report will also show prices rose about 0.4 percent in January compared to the previous month.

The past few months have boosted confidence that encouraging inflation reports last fall really do mark the start of a trend and that the economy does not appear to be headed for a recession – not yet. The labor market in particular continues to show remarkable strength, with employers adding 517,000 jobs in January and the unemployment rate falling to 3.4 percent, a low not seen since May 1969.

Employers added 517,000 jobs in January, amazing labor market growth

But the Fed keeps repeating that its battle to raise rates and slow the economy is far from over, and that there are many who could thwart its efforts. A key concern is that the remaining sources of inflation – many of which are linked to the hot labor market and rising wages – will be difficult to contain. Last week, University of Michigan polling results also showed that consumers’ inflation expectations for the coming year have risen even as they feel better about the economy overall.

“The moral of the story is that inflation is not cooling as fast as the Fed would like, especially core inflation,” said Diane Swonk, chief economist at KPMG, referring to a narrower measurement of inflation that excludes more volatile sectors. “And that’s something that will only reinforce their commitment to continue raising rates at least twice.”

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The Fed has raised rates eight straight times in less than a year, most recently by a quarter of a point, slower than most of 2022. Fed officials are planning a few more rate hikes of this magnitude, and then we’ll hold for a while and allow high interest rates to take hold. The Fed’s policy rate, known as the federal funds rate, is currently between 4.5 percent and 4.75 percent, a level high enough to slow the economy. Rates are expected to rise above 5 percent and officials will not announce rate cuts until 2024 unless inflation falls much faster than expected.

But only time and data will tell. So far, advances in inflation have largely come from improved supply chains, falling gas and energy prices, a cooling housing market and softening consumer goods prices. Now the Fed is more focused on a narrow measure of inflation that looks at certain services, including education, medical care and hospitality, where wage pressures and labor shortages can push prices up further.

Federal Reserve Chair Jerome H. Powell told the Economic Club in Washington, DC last week that the lengthy process of bringing inflation down “is unlikely to go smoothly. It’s probably going to be bumpy.” He said the expectation was confirmed by the hotter-than-expected January jobs report, and if economic data “continued” to come in stronger than expected, “we would certainly raise rates more” than officials are now anticipating .

The Fed hikes rates by 0.25 percentage point as inflation eases

Powell said commodity prices are moving in the right direction and housing costs should improve over the course of the year as rents on new leases stabilize. But there has been no progress in many service sectors, which are key to bringing headline inflation down.

“It’s going to take time,” Powell said last week. “We have to be patient. We think we need to keep rates at hawkish levels for some time before that goes down.”

Interest rates are lagging and it will be months before the magnitude of last year’s massive hikes is felt. That could mean more pain for the labor market or a significant drop in consumer spending. But for now, those key pillars of the economy remain intact: Mastercard estimates that US retail sales, excluding autos, rose 8.8 percent in January from a year earlier. And Goldman Sachs lowered the probability of the US economy going into recession in the next 12 months from 35 percent to 25 percent.

Sales remained strong at Forty Winks, a lingerie store in Cambridge, Mass. Having had a busy start to the year, the small business decided to add to its regular January and summer sales, a final pre-Valentine’s Day sale week featuring 20 percent off in-store and online, and an in-store party with biscuits and champagne. It was a hit.

Co-owner Rachel Wentworth said there’s been a great response to the sales, but overall she’s felt no setback in her nearly 13-year-old business. If anything, she’s looking for spots for some behind-the-scenes roles outside of the showroom to help the business grow.

“I always get nervous when I’m like, ‘Oh my god, we need to tighten our belts,'” Wentworth said. “But it doesn’t seem to translate to our business. I know it will be transferred to other companies. But our numbers are really good.”