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Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte, and today I'm addressing the January inflation report. In fact, as you might have seen, and contrary to expectations, inflation ticked up last month. Specifically, the consumer price index rose 0.5% in January after only increasing 0.1% in December.
So why are prices increasing again? Was the report positive or negative? And what does this mean for the long-term trend for inflation? I'm answering these questions today, and we even have a special guest that drops by to share a few of his thoughts. For all the links and resources mentioned today, just head over to youstaywealthy.com forward slash 180.
Inflation refers to the rise in prices, and it's important to monitor because the higher prices rise, the more our purchasing power declines. In other words, it takes more of our dollars to buy that same gallon of milk or take that same vacation. And as a result, us consumers have to either earn more money or find a way to spend less. Now, some inflation year over year is healthy and it's expected. But what if we're
But unexpected skyrocketing inflation or high prolonged inflation can cause some serious economic harm. And that's precisely why the recent spike in inflation has been making headlines for the last couple of years. Everyone, including the Fed, is nervous about higher than average inflation and the damage it can do if it's not contained.
I've covered inflation extensively on the podcast in recent years, but as a reminder, inflation reports, also known as CPI reports, they come out monthly. CPI stands for Consumer Price Index, and this index is measuring the monthly change in prices for things that everyday consumers are purchasing, food, energy, vehicles, shelter, etc.,
If all of these things become more expensive month over month, the CPI report will conclude that inflation is on the rise. Now, to be extra clear, when we see a spike in prices month over month, it doesn't mean that those prices are going to remain high for the future. It just means that they were higher last month than they were the month before. Sometimes prices jump up for a short period of time.
And sometimes those jumps are expected and predictable. For example, energy prices rising during the summertime when demand increases. So the January report is out and it shows that prices rose 0.5% last month, which was 0.4% higher than in December. According to the report, which I'll link to in today's show notes, the two largest contributors to the rise in the consumer price index were energy and shelter.
And while prices were up month over month, the annual inflation rate actually dropped slightly year over year. From January of 2022 to January of 2023, inflation was reported to be 6.4%, slightly less than the 6.5% number that we saw from December of 2021 to December of 2022.
So the rate in which prices are increasing year over year is slightly lower as of January, a small but positive change.
In fact, 6.4% is the lowest annual inflation reading that we've seen since October of 2021. And if you stretch it out even further, we see that the rate in which prices are increasing year over year is significantly lower today than a couple of years ago. For example, from June of 2021 to June of 2022, headline annual inflation was reported to be 9.1%.
So if you see news headlines over the next few days or a few weeks screaming that inflation is on the rise, you might remind yourself two things. Number one, it's normal for prices to increase every month and or every year. As previously noted, some inflation is normal and expected. Number two, for the last 12 months from January of 2022 to January of 2023, the rate in which prices have risen is slightly lower than the last reading.
And over the last couple of years, the annual rate of inflation is in fact much lower. Depending on the news outlet and their motivations, they just might not make that very clear. And as you've likely picked up on, these numbers are backward looking. These numbers tell us what happened last month or last year, not necessarily what will happen this month or this year. So while the information can be interesting and potentially useful, it's not intended to be predictive.
With that in mind, what do we make of the January report? What are some of the key takeaways? To help provide some perspective, here's my good friend Colin Roche, author of the Pragmatic Capitalism blog and founder of Discipline Funds, with his thoughts. We're seeing progress in the right direction with this report, but it's still moving at a pace that's uncomfortably slow. Prices are proving stickier than expected. But the good news is that a lot of the underlying data remains lagging, with housing in particular.
Owner's equivalent rent, the CPI's shelter measure, contributed 7.8% year over year. That's far too high, and this data notoriously lags.
Real-time housing and rent measures show substantially more moderation in prices, so this bodes well for lower inflation into the back half of the year, when the CPI's shelter measure component catches up. All in all, this inflation report was unsurprising, but confirms what the Fed has already communicated. They're likely to move rates to 5% on the overnight rate and hold for the remainder of the year. There's good news and bad news in that. The good news is that Treasury bills and cash will generate pretty good returns for the remainder of the year.
The bad news is that if you're looking to borrow for a car or house, then expect higher interest rates to linger for longer. Let me summarize some of the key points that Colin brought up there. First, month over month inflation was slightly higher than expected. However, year over year, the rate in which prices are rising has decreased slightly. And while the annual inflation rate is trending in the right direction, it's just not happening as fast as the Fed would like to see.
Cullen also reiterated that shelter was one of the largest contributors to the uptick in prices last month. However, he shared that shelter data typically lags, i.e. the shelter data in the CPI report isn't necessarily a good representation of the current state of housing. Real-time data shows that housing and rent prices are in fact slowing down. So his theory is that when shelter data catches up, we will likely see lower inflation numbers get reported later this year.
The good news here is that cash and treasury bills will continue to pay meaningful interest rates. The bad news is that the cost of borrowing will likely remain higher for longer.
So in summary, our current reality is likely more positive than the January CPI report and or some of the headlines floating around might suggest. Inflation is cooling, just not as fast as the Fed would like to see. And on that note, Michael Antonelli, a market strategist at Baird, reminded us the other day on Twitter that the rate of inflation doesn't typically go down in a straight line.
In similar economic situations in the past where inflation was higher than normal and efforts were made to slow it down, he points out that month over month prices have historically jumped up and down while that overall trend remained in decline.
In other words, a single monthly inflation report showing a larger than expected uptick in prices isn't necessarily uncommon and might even be expected. Lastly, one component that I've touched on before here on the podcast, but I haven't mentioned yet today is the labor market. Believe it or not, employers added more than 500,000 jobs in January alone, and hourly wages have grown significantly in recent months.
In other words, consumers still have jobs and healthy wages and therefore continue to spend even in the face of higher prices. And that is precisely why the Fed continues to maintain higher rates and will likely hike them again. Higher rates make borrowing more costly, specifically home mortgages. And since real estate is the economy, a slowdown in housing due to prolonged higher borrowing costs will likely begin to curb consumer spending to the degree that the Fed is looking for.
It's refreshing to see some positive data points show up, but unfortunately, we're likely in for another six to nine months of uncertainty with regard to the Fed and inflation.
Once again, to grab the links and resources mentioned in today's episode, just head over to youstaywealthy.com forward slash 180. Thank you as always for listening. Now we'll see you back here next week.