Inflation Slows Less Than Expected in January

• The Consumer Price Index (CPI) rose 0.5 percent in January after increasing 0.1 percent in December. This follows recent revisions that highlighted the pace of consumer price increases fell less at the end of 2022 than previously reported.
• Consumer prices were 6.4 percent higher when compared to a year ago. The shelter components of CPI led the gains in January.
• Although shelter was up 7.9 percent when compared to a year ago, declining market rents will soon drag down CPI increases.

“While disinflation is still underway, consumer prices rose more than expected in January as shelter costs show signs of persistence,” said Orphe Divounguy, Zillow senior economist.  

Consumer prices were 6.4 percent higher when compared to a year ago. Last month’s gains were mostly driven by shelter. The rent index and the owners’ equivalent rent index each rose 0.7 percent last month. 

A surprisingly stronger than expected price uptick in January, combined with revisions due to seasonal adjustments last week from the Bureau of Labor Statistics that revealed inflation hadn’t slowed as much in Q4 as previously reported, shows that inflationary pressures remain firm. This will likely bolster the Federal Reserve’s move to keep its foot on the economic brake pedal. Last week’s news highlighted that U.S. consumer prices rose in December instead of falling, as previously reported, and data for October and November were also revised up. In a vacuum, the restated figures likely didn’t meaningfully change most investors’ inflation outlook, but when combined with today’s CPI figures and this month's stronger-than-expected jobs report, we’re seeing a picture of more resilient inflation than the end of year narrative suggested. 

Despite inflation slowing less than expected, it’s important to remember that CPI’s key housing components will likely put downward pressure on the index in the coming months. Growth in market rent -- as measured by changes in the Zillow Observed Rent Index -- tends to lead the rent components of the CPI. With CPI rent making up 40% of core CPI, the slowing rent growth will soon drag down CPI increases.