An acceleration in consumer prices, for the month of January, could push the Federal Reserve to raise interest rates.
The consumer price index, a scale of changes in prices and goods, showed a 0.6 percent increase from December to January, Bloomberg reports. This was the largest month-over-month increase since February 2013.
Minus energy and food, which accounted for half of the percentage increase, the core CPI rose 0.3 percent. The highest increase of inflation in the past five months.
The cost of living is up by 2.5 percent from January of last year. The year-over-year increase is 2.3 percent, not accounting for energy and food, which showed the highest jump in prices this month. The spike in energy costs is one factor that could cause the Federal Reserve to raise interest rates.
The rise in inflation is a sign of a strong economy. However, economists are skeptical if the rise of inflation is good or bad for the economy in the interim, because the rate of inflation is at a five-year-high.
“Inflation is still relatively tame, but it is accelerating. Rising inflation is a symptom of an economy that is pretty healthy,” said Ward McCarthy, Chief Financial Economist at Fixed Income Jefferies.
The Federal Reserve could raise interest rates as soon as March. They have raised rates twice in 2015 and 2016, after almost a decade. The Federal Reserve aims for a 2 percent rate over time, to avoid weak economic conditions. However, inflation could change that.
On Tuesday, Janet Yellen, Chair of the Federal Reserve Bank, said to the Senate a rate hike could happen next month. Yellen said if the Federal Reserve delays raising rates, there will be a dramatic sharp increase down the road. The projected rise in rates, as described by Yellen, could send the economy into a recession.
“Up to this point, inflation had been creeping higher,” said McCarthy.
In result, the consumer costs of fuel and groceries have gone up. In addition, fewer people are dining out.
Gas prices were up 7.8 percent last month. While, food had increased by 0.1 percent in January and another 0.1 percent this February, after being steady for the last six months.
“Inflation pressures are on the rise, primarily as a result of increasing energy costs. As we’ve noted before, energy costs were particularly low this time last year,” said Lindsey Piegza, Chief Economist at Stifel.
“From a Fed official’s standpoint, rising energy prices will give added ammunition to the argument for a sooner-than-later adjustment in policy,” Piegza said.
Other increases in consumer costs were widespread. They include furniture prices, appliance prices, airline fare, apparel, housing, medical care, and new vehicle prices. The cost of goods had been on a decline between 2011 and 2015, but now that is subject to change.
However, change is inevitable with the transition of a new presidential administration.
“I see prices rising for the consumer. President Trump wants to impose a tax on imports. Consumers are going to have to pay more for their goods because companies will raise their prices,” said Youssouf Kouyo, a Market Analyst at Rabobank International.
“With rising prices and no further gains in income, I would suspect the consumer will struggle to maintain this level of spending,” said Piegza.