January’s inflationary numbers higher than most realize: CEI analysis

The Consumer Price Index numbers for January reportedly rose 0.3 percent compared to the month before, but CEI’s senior economist Ryan Young explains why core inflationary numbers are worse than most people realize.

 “The 3.1 percent headline number for January’s CPI is not reassuring, even though it is an improvement over December’s 3.4 percent. On closer inspection, it’s quite a bit worse.

“The 3.1 percent number is the total for the last 12 months. January’s month-to-month increase was 0.3 percent, compared to December’s 0.2 percent. That means inflation during the month of January sped up.

“Core CPI is much higher than the 3.1 percent headline number, at 3.9 percent over the last 12 months. Core CPI excludes food and energy prices, which fluctuate for reasons having nothing to do with monetary inflation and can distort the picture. That is why core CPI usually gives a clearer picture of inflation.

“In this case, energy prices have been falling like a rock, falling 0.9 percent in January and 4.6 percent over the last year. This is good news, though it also distorts CPI enough to make it look better than it actually is. In fact, falling energy prices explain most of the difference between the standard and core CPI numbers.

“Meanwhile, housing and transportation prices are rising faster than inflation.

“There isn’t much the Federal Reserve can do at this point. Interest rates are about where they need to be relative to inflation, and the Fed is continuing to let its balance sheet slowly return to normal levels following its record COVID-era growth. Today’s news may make the Fed lean against an interest rate cut at its next meeting on March 20.

“In the short run, policymakers at all levels of government can ease housing prices with more reasonable zoning restrictions and environmental review requirements that delay new construction.

“Long-term inflation control requires better discipline on spending. The trouble is that neither party has credibility on spending restraint, and markets know this. These expectations are one reason inflation is still higher than it should be, even after the Fed has restored control on its end.”