The Federal Reserve committee members were undoubtedly reaching for the bottle of Tums this week to ease the indigestion caused by rising inflation. Despite believing inflation was under control, the January data hinted at inflation threatening to move higher. CPI rose 0.5% in January, the biggest monthly gain in two years. Prices increased 3.0% from a year ago, the largest level since May 2024. Core CPI, which excludes food and energy, wasn’t much better with prices rising 0.4% in January and up 3.3% year-over-year, both measures the highest since early 2024. Increases were evident across the board, with the biggest contributors being shelter, energy & gasoline and food. Eggs alone rose 15% for the month and 55% from a year ago. Almost 30% of the total CPI gain came from shelter costs, although the increase for both rent and homeowners’ equivalent costs were lower than in the past. The categories with notable price declines included apparel and personal care products.

It is too soon to blame tariffs for the higher inflation numbers, although some analysts might say the increases were partly due to pre-tariff demand pushing prices higher. Bloomberg Economics attributes some of the increases to the “January effect” of businesses resetting prices at the start of the year. Whatever the reason, the Fed is even more likely to hold rates steady until at least the second half of 2025 as they continue to closely monitor inflation trends. This cautious approach aims to ensure that inflation is brought under control before considering any rate reductions. The futures market is pricing in one cut this year and that is not until September. 

KEY INDICATORS THIS WEEK

Retail Sales – January retail sales fell 0.9%, the largest decline in nearly two years, following a spending spree in the closing months of 2024. December sales were revised substantially higher, taking the sting out of January’s weakness. Nine of the 13 categories posted declines, including motor vehicles, sporting goods and furniture stores. The devastating wildfires in Los Angeles, the second-largest metropolitan area in the U.S., and severe winter weather in other parts of the country likely hurt sales in addition to higher costs in general. The only categories with positive sales were general merchandising, gasoline and restaurants & bars. Looking ahead to February sales, Valentine’s Day may provide a reversal from January’s dismal performance. The National Retail Federation estimates that consumers will spend $27.5 billion on Valentine's Day in 2025.This is up from $25.8 billion in 2024 and slightly above the previous record of $27.4 billion in 2020.