Prices rose faster than expected in January, hitting a 40-year high

A key inflation measure showed that prices are climbing at the fastest pace in 40 years and more quickly than economists had expected, the latest unpleasant surprise for the White House and Federal Reserve after a bruising year for American consumers.

Consumer price index data for January, released Thursday, showed that prices have climbed 7.5% over the past year, more than the 7.2% projected in a Bloomberg survey. On a monthly basis, they picked up 0.6%.

That is rapid by historical standards, and although it is slower than the fastest monthly increases in 2021, it too was above economists’ expectations. The underlying details of the report showed that price pressures are broadening and moving into longer-lasting categories, a development that is likely to prove worrisome for economic policymakers and painful for consumers.

Forecasters anticipate the inflation rate will fall significantly in 2022: Many expect it to finish the year closer to 3%. But economists regularly predicted that price gains would fade quickly in 2021, only to have those projections foiled as booming consumer demand for goods collided with roiled global supply chains that could not ramp up production fast enough.

And today’s price increases are hitting consumers in hard-to-avoid ways, as they show up in necessities: January’s inflation was driven by food, electricity and shelter costs, the Bureau of Labor Statistics said.

“It was more than expected, and it was broad-based,” Priya Misra, head of global rates strategy at TD Securities, said of the data. As a result, she thinks inflation will fade by less this year than previously projected.

“We’ve gotten used to these big headline numbers, but every aspect of ‘transitory’ you can push back against now,” she said.

Policymakers have expressed more humility around their outlook for inflation in recent months, especially at a time when ports remain clogged, rents and restaurant prices are on the upswing and wages are rising, all factors that could keep inflation hot.

High inflation has been a political liability for the White House, because rising prices have eaten away at household paychecks and detracted from a strong labor market with solid wage growth, leaving consumers feeling pessimistic.

It has also prompted the Fed to pivot away from its patient policy setting meant to foster a quick economic rebound from the pandemic, including keeping interest rates at rock bottom. Investors now expect that central bankers might lift interest rates six times this year as they try to slow down the economy and tamp down price gains.

“Making appropriate monetary policy in this environment requires humility, recognizing that the economy evolves in unexpected ways,” Jerome Powell, the Fed chair, said at his news conference last month.

The Fed aims for 2% inflation on average over time, though it defines that target using a different inflation index that is also elevated but not quite as sharply.

The new data prompted market investors and economists to up their expectations for the Fed to raise interest rates by half a percentage point in March, rather than a standard quarter-point move.

Inflation increasingly appears to be driven less by the pandemic and more by a strong economy. Price increases in 2021 were driven heavily by roiled supply chains that sent new and used car prices and furniture costs up drastically. Those continue to be a big factor elevating overall inflation, but other areas are also fueling the rapid rise.

Rent of primary residence, which counts for a big chunk of overall inflation and tends to respond more to economic conditions more than to unusual one-off trends, climbed by 0.5% in January from the prior month, a slight acceleration. Other shelter costs continued to climb at a steady but notable pace.

“The shelter makes me nervous,” Misra said, noting that the measure is important and slow-moving.

As shelter and other services costs pick up, policymakers are hoping that supply chains will start to catch up. That could allow goods prices to moderate or even fall — taking pressure off overall inflation.

Fed officials have signaled that they will begin raising interest rates in March. Higher rates can slow down consumer and business spending by making it more expensive to finance a car, house or machine purchase. Policymakers have also suggested that they will soon begin to shrink their balance sheet of bond holdings, which should push longer-term interest borrowing costs and further cool off the economy.

The Fed’s policy response, together with a slow return to more normal business conditions, is expected to slow price gains in the months ahead.

Consumers have also been buying goods at an unusually rapid clip, but recent data have suggested that they may be in the process of shifting back toward spending more heavily on services.

Still, rising pay may increase the risk that inflation remains too high for comfort this year. Jobs data released last week showed that average hourly earnings climbed rapidly — and much more than economists expected, though still not quite enough to keep up with rapid inflation.

Companies may be able to offset rising labor bills with productivity improvements, but if not, they might pass those costs along to customers to protect their own profit margins. That said, corporate profits presently look very strong and productivity is high, which may give companies room to absorb bigger wage bills. And in recent decades, the relationship between wage growth and inflation has been weak.

Some economists even worry that the Fed might act too aggressively, slowing down the economy just as price gains and economic growth moderate on their own later this year. The Fed has a historical track record of touching off recessions as it uses its blunt tool — an ability to choke off demand — to guide the economy.

“My concern is that they overdo it — being too sensitive to wage growth,” Ryan Sweet, who leads real-time economics at Moody’s Analytics, said before the report. “This is not going to be easy.”

Krystle Brown, 33, and her husband embody many of the hopes and challenges of a complicated economic moment marked by a strong job market and rocketing inflation. They recently bought a condominium in Salem, Massachusetts, driven in part by the belief that if they did not buy now prices would only climb higher.

They will be able to afford their mortgage payment more easily because Brown, a visual artist, recently got a new and better-paying job. She had been working two — as a cake decorator and a marketing director at a gallery — making about $42,000 a year combined. Now, she’s a marketing assistant at an art museum, making about $50,000 per year.

But even with the higher salary, the couple does not earn a lot for their area, and inflation is making things harder. Groceries cost more, and the rapid run-up in car prices has put Brown’s hopes of buying a hybrid or electric vehicle on ice.

“There are so many different elements to it,” she said. “And they interact.”