Not so fast: Lowering inflation will have bumps in the road

Why it matters: A single report does not kick the U.S. economy off the disinflationary path.

• But it might stoke concerns that beating inflation will be a bumpy ride — much to the disappointment of American consumers, Federal Reserve officials and a Biden administration looking to sell the economy to voters.
• "[T]he path toward inflation normalization is likely to be prolonged, with ups and downs along the way," economists at TD Securities wrote.

By the numbers: Overall CPI rose 3.1% in the 12 months through January, a smaller increase than the 3.4% rise the prior month.

• But progress on core inflation — a measure that strips out food and energy prices and is considered a better gauge of underlying inflation — stopped: It rose 3.9%, the same as December. The index's monthly increase of 0.4% was the biggest since last spring.
• By a different measure, core CPI actually accelerated: The three-month annualized rate was 4% in January — up from the 3.3% in December.

The big picture: Fed chair Jerome Powell said the central bank wants "more good data" to confirm inflation is really returning to its 2% target.

• "Fed policymakers will likely put this inflation report in the 'not so good' column as they continue to exercise caution in assessing when to start easing policy," EY-Parthenon chief economist Gregory Daco wrote Tuesday morning.
• A rate cut next month was already off the table. More reports like Tuesday's could push it to even later this year.
• Bond yields spiked in response to the data, reflecting chilled expectations of rate cuts.

Yes, but: Much of the hotter-than-expected report comes down to sticky housing costs. The shelter index rose 0.6% — the largest factor in the core CPI's monthly increase, the government said.

• The way the government measures housing prices for CPI is wacky. Private sector data, for instance, shows cooling costs that have yet to be reflected in the official data.
• Of note: Housing is accounted for differently in the personal consumption expenditures price index — the gauge of inflation targeted by the Fed.

The intrigue: Stubbornly high costs in the services sector were a big driver of the hotter-than-expected inflation report — even if you strip out the sticky housing costs.

• The Fed has noted concerns about the services sector, where labor costs make up a bigger chunk of business expenses. Officials worried that the persistently strong job market could make prices in the sector more difficult to stamp out.
• The central bank has been watching the prices of services, excluding energy services and housing costs.
• This measure rose 0.8%, the most since April 2022, per Bloomberg.

What they're saying: "[Tuesday's] CPI report reinforces the Fed's concern that core services inflation will remain sticky because of a tight labor market," economists at BofA wrote in a note.

Details: Some of the price surges may be caused by one-off factors. Others might be proven more sticky.

• The "food away from home" index — i.e., eating out at restaurants — jumped by a half percentage point in January, the most since last spring.
• The index for motor vehicle insurance rose 1.4%. Hospital service charges jumped 1.6%, while transportation services rose 1%.

Meanwhile, costs for some goods saw some relief — helped by a large drop in used car and truck prices that declined outright by 3.4% in January.

• However, grocery store prices — particularly salient for consumers — rose by 0.4% last month after a lengthy stretch of more muted price gains.