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Inflation Rose in January to 3.1%, Dimming the Prospects for Interest Rate Cuts in March

Inflation remains stubbornly high in key areas, which will likely delay Fed’s anticipated cuts.

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Despite inflation cooling some in January, the latest US Consumer Price Index data likely means the Federal Reserve won’t lower interest rates in March.

Inflation increased 0.3% in January to 3.1% over the last 12 months, according to the CPI data published by the Bureau of Labor Statistics. That’s down from 3.4% in December, and it’s down significantly from a year ago when it was 6.4%. However, even though prices aren’t rising like they were a year ago, they’ve remained higher than they had been before the pandemic.  

Those high prices continue to hurt consumers, so lowering inflation is among the Fed’s primary goals before cutting rates, Chairman Jerome Powell emphasized at the Federal Open Market Committee’s first meeting of 2024, when it voted to continue holding the benchmark interest rate steady at a target range of 5.25% to 5.5%.    

“High inflation imposes significant hardship, as it erodes purchasing power, especially for those least able to meet the higher costs of essentials like food, housing and transportation,” Powell said at the press conference following the meeting. “We’re fully committed to returning inflation to our 2% goal.”

The inflation rate has consistently remained above the Fed’s 2% target rate since April 2021. Housing costs continued to rise in January, increasing 0.6%, and food prices increased 0.4% in January.

The Fed indicated at its final meeting in 2023 that it anticipated making multiple interest rate cuts in 2024, but those cuts aren’t likely to come as soon as some had hoped. 

“Anyone waiting for rates to decrease before making a big purchase or refinancing debt should consider waiting a little longer, if they are able to do so,” said Summer Red, AFC and education manager for the Association for Financial Counseling & Planning Education.

On the flip side, Red noted that savers shouldn’t wait to take action.

“People looking to save might want to consider CDs and other accounts that will lock in current rates,” she said.

Inflation isn’t something that can be tackled overnight, and it’s still taking a toll on US households and consumers. Here’s a quick primer on the state of inflation and steps you can take to prepare for what’s ahead.

What is inflation?

Inflation means your dollar bill doesn’t stretch as far as before, whether at the grocery store or a used car lot. 

Inflationary pressures happen over time and require historical context to understand. For example, in 1993, the average cost of a movie ticket was $4.15. Today, watching a film in the theater will easily cost you $13 for the ticket alone, never mind the popcorn, candy or soda. A $20 bill 30 years ago would buy someone more than double what it buys today. And while wages have also risen over the past few decades, they haven’t kept up with inflation. Consumers have less purchasing power. 

What the latest CPI data tells us

Many experts expected the overall inflation rate to come down further than 3.1% for the past 12 months -- some anticipated inflation to come in as low as 2.9%. The decrease from December indicates the  overall inflation rate is abating, albeit more slowly than some may have expected.

Core inflation, which excludes the volatile prices of food and energy, remained at 3.9% year-over-year in January -- the same increase as in December when the core inflation rate dipped below 4% for the first time in more than two years. Housing costs accounted for more than two-thirds of the increase. 

Are we still in a period of high inflation?

Inflation affects everyone differently, and it isn’t determined by observation. It’s backed by a consensus of experts who rely on market indexes and research. 

One of the most closely watched gauges of US inflation is the Bureau of Labor Statistic’s CPI, which tracks data on 80,000 products, including food, education, energy, medical care and fuel. The BLS also puts together a Producer Price Index, which tracks inflation from the perspective of the producers of consumer goods, measuring changes in seller prices in industries like manufacturing, agriculture, construction, natural gas and electricity. 

There’s also the Personal Consumption Expenditures price index, a broader measure prepared by the Bureau of Economic Analysis, which includes all goods and services, whether they’re bought by consumers, employers or federal programs on consumers’ behalf.

The current inflationary period started back in April 2021, when consumer prices jumped at the fastest pace in over a decade. Inflation was originally thought to be temporary while economies bounced back from COVID-19. 

But as months progressed, supply chain bottlenecks persisted and prices skyrocketed. The US was then hammered by unanticipated shocks to the economy, including subsequent COVID variants, lockdowns in China and Russia’s invasion of Ukraine, leading to a choked supply chain and soaring energy and food prices. 

How the Federal Reserve’s rate hikes relate to inflation

The Fed moderates inflation and employment rates by managing the money supply and setting interest rates. Part of its mission is to keep average inflation at a steady 2% rate. 

“As inflation rises, the Fed has to try to control it. Really, the only tool that the Fed has in order to do that is raising policy rates,” said Liz Young, head of investment strategy at SoFi.

When the Fed increases the federal funds rate -- the interest rate banks charge each other for borrowing and lending -- it restricts how much money is available to borrow and spend, which has an impact on economic growth. Banks pass on rate hikes to consumers, meaning everything from credit card APRs to interest rates on personal loans tick up. Consequently, this can drive consumers, investors and businesses to pause their investments, leading to a rebalance in the supply-and-demand scales. 

In general, when interest rates are low, the economy and inflation grow. And when interest rates are high, the economy and inflation slow.

When the inflation rate hit 8.5% in March 2022, the Fed set off an aggressive sequence of interest rate hikes in an attempt to slow the economy and curb prices by reducing consumer borrowing. After 11 rate hikes, the Federal Reserve paused interest rates at a target range of 5.25% to 5.5% in July 2023. 

The Federal Reserve’s next meeting to vote on interest rates is slated for March 19-20.

What does inflation mean for you? 

Periods of high inflation make it harder to afford everyday essentials. Interest rate hikes mean it costs more for businesses and consumers to take out loans, so buying a car or home gets more expensive. As interest rates increase, liquidity in securities and cryptocurrency markets decreases, causing those markets to dip. Credit card debt and other forms of high-interest debt become more expensive.  

Though inflation has been easing for the past few months, it’s still unpredictable. Fed officials stated after their December meeting that inflation had “eased,” voting nearly unanimously that the policy rate will be lower by the end of 2024 but tempered expectations of rate cuts at its first meeting this year.

In the current period, experts recommend trying to chip away at debt the best you can. One option is applying for a debt consolidation loan that could combine any high-interest variable debt into a lower-interest, fixed-rate loan and establishing a payoff plan. Getting a balance transfer card can also help you avoid high interest for a period of time. If the economy continues to be volatile, it’s also important for households to build up a financial cushion. 

While inflation has been stubborn, there’s one financial advantage to increased rates: Many CDs, high-yield savings accounts, money market accounts and treasury bonds are offering annual percentage yields, or APYs, at around 4% and 5% -- the highest savings rates seen since the 1990s. Experts recommend taking advantage of putting your funds in one of these accounts to get a bigger return on your balance before the Feds lower interest rates. The interest you earn can help you reach your emergency fund or sinking fund goal faster.

Dashia is a staff writer for CNET Money who covers all angles of personal finance, including credit cards and banking. From reviews to news coverage, she aims to help readers make more informed decisions about their money. Dashia was previously a staff writer at NextAdvisor, where she covered credit cards, taxes, banking B2B payments. She has also written about safety, home automation, technology and fintech.
Tiffany Wendeln Connors is a senior editor for CNET Money with a focus on credit cards. Previously, she covered personal finance topics as a writer and editor at The Penny Hoarder. She is passionate about helping people make the best money decisions for themselves and their families. She graduated from Bowling Green State University with a bachelor's degree in journalism and has been a writer and editor for publications including the New York Post, Women's Running magazine and Soap Opera Digest. When she isn't working, you can find her enjoying life in St. Petersburg, Florida, with her husband, daughter and a very needy dog.
Liliana Hall is an editor for CNET Money covering banking, credit cards and mortgages. Previously, she wrote about personal credit for Bankrate and CreditCards.com. She is passionate about providing accessible content to enhance financial literacy. She graduated from the University of Texas at Austin with a bachelor's degree in journalism, and has worked in the newsrooms of KUT and the Austin Chronicle. When not working, she is probably paddle boarding, hopping on a flight or reading for her book club.
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