Yahoo Finance

Inflation picked up in the first month of the year, defying optimism from investors and officials over a steady move lower seen in recent readings.

The Consumer Price Index (CPI) for January showed a 0.5% increase in prices over the past month, an acceleration from the prior reading, government data showed Tuesday. On an annual basis, CPI rose 6.4%, continuing a steady march down from a 9.1% peak last June.

Economists had expected prices to climb 6.2% over the year and jump 0.5% month-over-month, per consensus estimates from Bloomberg. New seasonal adjustments released by the BLS on Friday also switched December's initial reading of a 0.1% monthly drop in headline inflation to an increase of 0.1% in the year's final month.

Core CPI, which strips out the volatile food and energy components of the report, climbed 5.6% year-over-year, more than expected, and 0.4% over the prior month. Forecasts called for a 5.5% annual increase and 0.4% monthly rise in the core CPI reading.

U.S. stocks slid following the release, while Treasury yields declined, as investors assessed the implications of Tuesday's release on Federal Reserve policy,

The headline figure for January was the smallest 12-month increase since the period ended October 2021, while the core annual reading was the smallest since December 2021. Even as the inflation picture has improved since the peak of the current cycle last year, rising costs for essential items remain a burden for U.S. consumers.

Policymakers monitor "core" inflation more closely due to its nuanced look at key inputs like housing, while the headline CPI figure has moved largely in tandem with volatile energy prices last year.

Housing prices continued to be the dominant factor in the CPI report by far, accounting for nearly half of the monthly jump in inflation, the Bureau of Labor Statistics said.

The shelter category of CPI — which accounts for 30% of overall CPI and 40% of the core reading — increased 0.7% over the month and 7.9% over the last year.

For Fed Chair Jerome Powell, shelter inflation — a "stickier" component of CPI that has remained stubbornly high — is a key component of evaluating the path forward for interest rates. In a sit-down interview last week in Washington, D.C., Powell said he expects housing inflation to fall in the middle of the year.

"There has been an expectation that [inflation] will go away quickly and painlessly; I don’t think it’s guaranteed that’s the base case," Powell said last Monday at the Economic Club of D.C., even as he acknowledged the presence of "disinflation" in the economy. "It will take some time."