An inflation gauge closely monitored by the Federal Reserve worsened in January, underscoring that prices remained elevated even before the Iran war began to disrupt global energy markets. The Commerce Department said prices increased 2.8% in January from a year earlier, a reading that came in slightly below December’s increase, a report that was delayed by the government shutdown that ran for six weeks last fall.
The data also showed core inflation—excluding volatile food and energy—pushed higher. The Commerce Department said core prices rose 3.1% year over year in January, up from 3% in the prior month and at the highest level in nearly two years, and it said core prices jumped 0.4% on a monthly basis. If that month-to-month pace held, it would put inflation well above the Federal Reserve’s 2% annual target.
The January inflation report is especially notable for its timing. The Iran war began Feb. 28 and has shut down the Strait of Hormuz, cutting off one-fifth of the world’s oil supply, according to the AP report, which cited AAA and other economists’ expectations. With oil prices rising more than 40% since the war began, the report said gas prices have jumped to $3.60 a gallon from just under $3 a month earlier, a move economists expect will feed into higher inflation readings in March and potentially April.
Federal Reserve officials have kept their key interest rate elevated to slow borrowing, spending and growth as they work to cool inflation further. The data landed ahead of the Fed’s meeting next week, where policymakers are widely expected to keep the rate unchanged, at least in part because the Iran conflict is expected to raise inflation in the short run.
The same Commerce Department report also pointed to steady demand. It said consumers lifted their spending at a solid 0.4% pace in January, matching December’s increase, and it said consumer spending powers about two-thirds of the economy. The report also said incomes rose 0.4% in January, while after-tax incomes increased 0.9%, supported by a rise in Social Security benefit payments tied to a large cost-of-living adjustment that took effect at the start of the year.
Separately, the report includes the personal consumption expenditures price index, which differs from the more widely followed consumer price index that was released earlier this week. The AP report said the PCE index has been running hotter than the CPI in recent months, in part because it assigns less weight to rental costs, which it said have been cooling steadily.