Intelligent Investment

Economic Watch: January Inflation Signals More Fed Tightening Ahead

February 14, 2023 3 Minute Read

Executive Summary

  • The Consumer Price Index (CPI) rose by 0.5% in January or 6.4% year-over-year, above consensus estimates of 0.4% and 6.2%, respectively. Shelter, food and energy costs accounted for most of the increase.
  • Core inflation, which excludes food and energy prices, rose by 5.6% annually, above expectations of 5.3%.
  • CBRE still expects inflation to end 2023 at 4%; however, the path to lower inflation will be choppy. The Fed remains on track for another 25-bais-point increase in the federal funds rate next month, with a growing possibility of an additional hike in May.

The Bottom Line

The rate of headline inflation increased to 0.5% in January from 0.1% in December, while the rate of core inflation (excluding food and energy) held steady at 0.4%. This is consistent with Federal Reserve Chairman Jerome Powell’s belief that the disinflationary process takes time and “is probably going to be bumpy.” Nevertheless, CBRE forecasts that the inflation rate should be down to 4% at year-end. We expect that the shelter component of services inflation, which drove much of January’s increase, will ease in the near term.

Looking ahead, the Fed is expected to increase the federal funds rate by 25 basis points next month, with an additional hike in May possible if inflation persists, particularly in the services sector. With the Fed maintaining high interest rates all year, CBRE expects a moderate recession to take hold as the lagged impact of tight monetary policy slows the economy. Volatility in financial markets will temper investment activity over the coming months before a recovery begins around midyear. The recovery in leasing activity should follow later in the year.

Figure 1: CBRE House View

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