• January CPI surprised higher with headline rising 0.5% (3.0%oya) and core up 0.4% (3.3%oya)
• Rental inflation continued its gradual trend toward cooling, but used vehicle prices, auto insurance, lodging once again bounced higher
• Given we are tracking a 0.27% increase in core PCE prices and questions of residual seasonality remain, we see the Fed remaining on hold at upcoming meetings.

The January consumer price index (CPI) surprised to the upside as the headline index rose 0.5% (0.467% to three decimals), nudging the year-ago inflation rate back to 3.0%.The surprise was largely in the core (ex. food and energy) index, which rose 0.4 (0.446% to three decimals) in January, also nudging up year-ago core CPI inflation, to 3.3%. Based on today’s report, we are tracking 0.27% (2.6%oya) for January’s core PCE release. That lower estimate owes to some CPI firmness occurring in categories either not within scope of the core PCE deflator or that enter with smaller weights. Tomorrow’s January PPI report may impact our tracking estimate. Given recent comments by Fed officials, including Chair Powell’s semi-annual testimony before Congress this week, today’s data appear consistent with our expectation for the Fed to stay on hold at upcoming meetings.

In the details, food prices rose 0.4%, the fastest monthly pace in two years, as prices of eggs jumped 15.2% last month—the largest one-month gain in a decade—due to avian flu. Energy prices firmed 1.1% in January as well, with gasoline prices rising 1.8%m/m. But, as noted above, most of the upside surprise was in the core. Overall, core goods prices rose 0.3% in January, which was the firmest reading in nearly two years, and could reflect some pressure from front-loaded trade ahead of tariff concerns. Core services, meanwhile, increased 0.5% last month.

Several of the upside surprises represent prior usual suspects that actually had appeared to be cooling late late year. For example, used vehicle prices surged 2.2% last month (but new vehicle prices were effectively flat), while auto insurance jumped 2.0%. That returned auto insurance growth to the much firmer trend seen in 2023 and early 2024 rather than aligning with the cooler prints more recently. It is possible that recent natural disasters (including the hurricanes in the Southeast and wildfires in California) are putting some upward pressure on this set of prices.

On the other hand, owners’ equivalent rent and tenants’ rent both rose just 0.3% in January (0.313% and 0.347%, respectively), suggesting that the long-awaited gradual cooling in rental inflation is underway. However, lodging away from home firmed unexpectedly, up 1.4% on the month. Given these data, the “supercore” measure of CPI leapt 0.8% in January. This, too, represented a mix of usual suspects (in addition to lodging and auto insurance, airfares rose 1.2%) and some big idiosyncratic moves (cable and satellite TV services jumped 1.8% in January, which was the largest single-month rise in twenty years.) Other categories were more aligned with expectations and recent experience. Apparel fell 1.4% in January while medical care and education both advanced 0.2%; communication rose 0.4% largely due to higher internet service prices.

Finally, this report included updated seasonal adjustment factors back through 2020. These led to only small changes in the monthly pattern of CPI inflation; these revisions do not impact the year-ago inflation measures as they are based off the NSA data. But the question of whether residual seasonality is biasing up the CPI data at the start of the year remains. With the seasonal factors incorporating more of the post-pandemic period of elevated inflation but the trend in inflation cooling, it isn’t immediately clear how much seasonal distortion remains—additional data this year will help to confirm. For the Fed, while the recent firming isn’t exactly welcome, the possibility that data early in the year are overstating the true inflation dynamics likely leaves them in waiting and watching mode as they look for signs that inflation is continuing to converge toward their 2% inflation mandate.