​​Truflation: US Inflation Update for January 2024

Executive Summary 

January saw an unexpectedly strong jobs report, with the US economy adding 353,000 new jobs, and we also saw consumer confidence rebound to the highest level since Truflation initiated its Consumer Sentiment Index 18 months ago. Economic growth for Q4 also came in well above market expectations at 3.3%, while stock markets and corporate earnings have seen a strong start to the year.

As a result of this, consumers have continued to spend and take on more debt. As such, though we see inflation dropping in January to reflect the post-holiday blues, we foresee a reversal of this trend later in the quarter. In January, we see the BLS CPI reading dropping from 3.4% in December to 2.5%, driven primarily by goods prices, while we expect services inflation will hold steady. In comparison, economists’ predictions range from 2.7% to 3.0%.

The key highlights of this month's Inflation Report are:

• Food, alcoholic beverages, apparel, and household durables experienced significant downward movements in inflation in January, driven by consumers returning to their normal purchasing behaviors after the holidays.
• Transportation prices keep falling due to falling gas prices and excess vehicle supply. However, we may see gas prices rise again, driven by the Red Seas conflict and the stability of demand in the US due to the strength of the economy.
• Housing prices are on the rise again, especially owned housing. High mortgage rates have only dampened the market slightly and, with continued supply shortages, the housing affordability crisis is set to continue.
• Health and utilities were the biggest contributors to upward inflation in January. There are still inflationary pressures here from the services element, driven by the tight labor market.

We expect to see significantly stronger core inflation compared to food and utilities, suggesting that the Fed still has more work to do to bring inflation under control. 

Given the ongoing strength of the US economy, it is questionable whether there is any need for the Fed to reduce interest rates in the short term. In addition, we are expecting inflation to rebound in February and March after the January dip, making a March rate cut even less likely.

Consumer spending remains strong in a tight labor market

On January 25, the Bureau of Economic Analysis (BEA) released its advance estimate of GDP growth for Q4 2023, which came in at 3.3% – significantly higher than the previously expected 2%. On top of this, the US consumer remains extremely resilient, defying market expectations.

In particular, spending remained strong in December as a result of the festive season. Retail sales increased 0.6% month-over-month (MoM) and 5.4% year-over-year (MoM). This figure marked an acceleration from November’s 0.3% MoM growth and beat economists’ estimates of 0.4%, driven primarily by clothing, accessories, and online sales.

Graph 1: Monthly Retail Sales and Inventories - Adjusted

Source: US Census Department; Advance Monthly Retail Trade Survey

The sales gains were broad-based and indicate that consumers are keeping up with price increases in the market. This rampant consumer spending certainly adds complexity to the Federal Reserve’s monetary policy decision at the next meeting in March.

At the same time, inventory levels have peaked and started to see a slight decline. However, this was somewhat offset by the continued growth in inventory levels of motor vehicles and parts dealers, suggesting that we are likely to see further downward pressure on vehicle prices, even as inventory levels drop in other sectors.

With consumer spending still on the rise, how is this being funded? For one part, it appears consumers are still borrowing to fuel their spending patterns, especially on their credit cards. Household debt has hit a new record, up 3.6% YoY and 1.2% quarter-over-quarter (QoQ) at $17.503 trillion. Since 2011, all debt categories have been steadily rising. Credit card debt is a key component of this, increasing by $50 billion (14.5% YoY and 4.6% QoQ), now standing at $1.129 trillion.

Graph 2: Household Debt Balance and its Composition; $ Trillions 

Source: Household Debt and Credit Report, Federal Reserve Bank of New York

This situation is exacerbated by the return of student loan debt repayments, which are a significant portion of the outgoings for many households, with total student loan debt sitting at $1.74 trillion as of Q3 2023. 

Given the higher interest rates, it is no surprise to see credit card delinquencies gradually increasing to an annualized rate of 4.5% (as of Q3 2023), though they remain below the average rate seen during the 2000s. The Q4 number is scheduled to be released on February 20. Interestingly, the delinquency rate on single-family residential mortgages has been gradually declining and has been under 2% for the last six quarters.

Graph 3: Delinquency Rate on Credit Card Loans & Single Family Residential Mortgages

Source: Board of Governors of the Federal Reserve System (US)

Beyond accumulating more debt, consumers continued dipping into their savings. The last month of 2023 saw the personal savings rate slip to 3.7% from 4.1% in November (according to the Bureau of Economic Analysis, Personal Income and Outlays Report).

The labor market has also remained very tight, with total non-farm payroll employment rising by 353,000 in January, marking a significant increase compared to the previous months. Job gains occurred in professional and business services, healthcare, retail trade, and social assistance. The net result is that the unemployment rate as reported by BLS on February 2 remained stable at 3.7%.

Due to the strong employment market and the impact of union negotiations, we have seen wage increases accelerating further in December to an annualized rate of 6.8% from 5.2% YoY in September. Given the continued impact of all the unionized labor agreements, wages are likely to see strong growth in the coming months compared to last year.

In addition, the markets posted a strong start to the year in January. The S&P 500 is up 4.6% YTD, the Nasdaq has risen 5.8%, while Bitcoin is trading above the $45,000 mark (at the time of writing). This will buoy consumers’ ability to spend with the help of incremental returns on their investments.

With the economy remaining as strong as it is, inflationary pressures are likely to last longer than anticipated. While the Fed has made progress in bringing inflation in line with its 2% target, it remains above this goal, which will no doubt influence monetary policy decisions this year.

Indeed, the Fed's next move is perhaps the most difficult one as it ponders the timing of the first interest rate cut in this cycle. Fed Chairman Jerome Powell has been consistently clear that his primary objective remains the 2% inflation target – even at the expense of an economic slowdown. Given the economic data available, there is currently very little justification for a rate cut come March. Inflation remained stubborn in Q4, driven by the festive season. Despite expecting a slowdown in inflation in January due to the post-holiday blues, we believe that this will be a short-lived hiatus before a rebound in price growth later in the quarter. 

The annual changing of the guard at the FOMC, which took place in January, may also lead to a more hawkish stance. Only one of the four new committee members (San Francisco Fed president Mary Daly) has publicly called for a discussion on rate cuts, while the others are more hawkish. It will also be interesting to see whether the committee can maintain the same level of cohesion in its decisions in 2024, especially given that this year's calls are likely to be more contentious than what we saw in 2023. A more divided FOMC could delay any interest rate cuts further. 

As long as inflation remains undesirably high and the economy stays strong, it’s reasonable to expect the Central Bank to keep rates higher for longer. Fed officials have said that as long as the economy stays healthy, they can take their time before cutting rates.

Recent inflation trends

After several months of sticky inflation, we expect the CPI to drop significantly in January as consumers restrict their spending on semi-luxury items and the general exuberance seen during the festive season. These post-festive blues will result in a drop in the BLS CPI number in January.

Truflation’s outlook and forecasts for the BLS CPI number are based on the previous year's update of household expenditure patterns, which the BLS uses to determine the relative importance of each category in the index. Normally, this is updated every January, but we have yet to see this data for 2024. Without the details of this adjustment, there can be discrepancies in the forecast projection, since the category weightings have a significant impact on the overall inflation number. However, regardless of this detail, a significant cooling trend is to be expected in January, not only because we have seen this trend in the past, but also because this is supported by the Truflation data.

While the economy remains strong, the threat of inflation staying around for longer lingers on. In fact, core inflation (which excludes volatile food and energy items) is only just starting to recede but is nowhere near the 2% target, while the tight labor market will continue to prop up the prices of services. 

Based on this, Truflation is expecting January’s BLS CPI inflation figure to come in at 2.5%, down from 3.4% YoY in December 2023. The market’s expectations for the BLS January CPI release range from 2.7% to 3.0%. 

On a monthly basis, we expect inflation to decrease by 0.28%, while core inflation is also set to start softening in January after several months of increases. However, while the cost of goods is receding, inflationary pressures are still coming from the services sector. 

Graph 4: Truflation Core Inflation Measures (Goods vs Services vs Core)

A major reason that inflation has eased more than expected is the decline in the cost of goods as supply chain constraints have alleviated. It is the services element that remains a cause for concern, especially as there are recent signs that the labor supply has peaked. In December, the labor force shrank by 676,000 and annual wage growth ticked up to 6.7% YoY. 

Along with this tightness in the labor market and rising wages, we are also still seeing price increases in some categories. In particular, apartment rental prices are rising faster than they did before the pandemic. The expectation is that rent prices will cool due to the onslaught of new apartment buildings being completed, but this has yet to show up in the data. Similarly, some prices in the service sector, such as restaurant meals, are still accelerating. 

There is also the risk that supply-chain snarls, which triggered inflation in the early days of the pandemic, could flare up again as a result of the military conflict in the Red Sea. In short, continued risks remain and we believe that inflation has not been vanquished yet.

Truflation’s Consumer Sentiment Index started 2024 with a bang as consumer confidence surged, with a massive uptick in January to 96.91% from December’s 91.96%. This is the highest reading we have had since Truflation started measuring consumer confidence in June 2022 and marks a third successive monthly increase. This rise in confidence likely reflects the slowdown in inflation, the anticipation of lower interest rates ahead, and continued favorable employment conditions. 

 Graph 5: Truflation Consumer Confidence Trends

 It is clear that as supply concerns have alleviated, price spikes have also begun to unwind. Now, inflation is primarily driven by soaring consumer demand. As such, January’s rebound in consumer confidence has implications for Truflation’s inflation outlook. 

Graph 6: Category Percentage Contributions to Truflation CPI

With this backdrop in mind, the most significant upward contributions to inflation in January came from health, utilities, and owned housing, while food, transportation, alcohol, clothing, and household durables and daily use items were the biggest downward contributors.

Categories applying downward pressure on prices in January

In January, the five main categories that contributed to the downward inflation trend were food, alcohol, transportation, apparel, and household durables, mostly reflecting price drops in goods categories and the post-festive seasonal trend. Combined, this makes up nearly half of Truflation’s US CPI index.

The transportation category saw inflation decline by -0.48% MoM in January, representing the fourth monthly decline in a row and bringing down the annualized rate to +1.78% YoY.  This was driven by a -1.8% drop in gasoline prices this month (again representing the fourth significant drop in a row), with deflation in this subcategory hitting -6.8% YoY.  

Since crude oil prices peaked on September 27, 2023, we have seen a continuous steady decline, although January has seen the reversal of this trend, with the price increases driven in part by the turmoil in the Red Sea. In addition, winter storms slammed US oil production, while new data showed the US economy remained resilient suggesting robust demand for fuel ahead.

Graph 7: Price of WTI Crude Oil per Barrel

US$73.48 on February 7, 2024

Data Source: Weekly Petroleum Status from the Energy Information Administration

The Strategic Petroleum Reserve (SPR) has been gradually increasing since the beginning of August 2023, and the EIA forecasts that output will return to 13.3 million barrels per day in February, as demand in the US is expected to remain relatively stable. The production output in the US was at an all-time high in December at more than 13.3 million per day, falling to 12.6 million per day in January due to the impact of cold weather.

The expectation is that Brent Crude oil prices will increase further in Q1 due to the heightened uncertainty around global oil shipments. Given the intensifying attacks on the Red Sea, the market expects downward pricinge pressure will not emerge until Q2, driven by general increases in global oil inventories. However, ongoing supply disruption risks in the Middle East create the potential for higher Crude oil prices.

Graph 8: Truflation Transportation Category Price Trends

Vehicle purchases (new and used) were also down -0.46% MoM and +3.11% YoY, respectively. This has been driven by sluggish demand for new and used cars in the last couple of months, although there are signs of an upward trajectory here. 

This anemic demand, along with high financing interest rates and excess inventory, has continued to place downward pressure on vehicle prices. Auto retail inventory rose to $224.9 billion in December, up from $198 billion a year ago. As inventory levels outstrip demand, we expect prices in this category to continue falling. 

Graph 9: Motor Vehicle and Parts Dealers in $ Millions:; Adjusted Sales and Inventories

Source: US Census Department:; Advance Monthly Retail Trade Survey

Public transportation prices have tumbled as the festive season has come to an end. Travel data shows a drop in the number of customers getting on planes. Personal travel can be expected to take a back seat until the next set of holidays comes into effect, with passenger numbers driven primarily by business travel until then. 

The food category, along with alcohol prices, has also seen a reversal of the previous month's trends, with inflation coming in at -0.58% MoM in January and +0.46% YoY. We have seen this downward trend across both grocery prices and the cost of dining out. Alcohol prices are down -0.47% MoM and up +4.03% YoY.

Graph 10: Truflation Food & Beverage Category Price Trends

January’s declines in the prices of food and alcohol were driven by consumers returning to their normal purchasing behaviors and no longer buying premium products, like champagne and premium food items, for festive parties. The United States Department of Agriculture (USDA) is expecting food price growth to decelerate in 2024. It is predicting a +1.3% increase this year, which will be significantly lower than 2023, but it does anticipate the financial food inflation number to come in within a range of -1.4% to 4.2%. This means that consumers will likely still have to get used to paying more for food.

With the labor market remaining strong, seeing an increase in food prices is a normal economic phenomenon, especially with wage growth outstripping food inflation. Consumers have seen a significant increase in purchasing power in the last eight months, though this has yet to catch up with three years of significant inflationary pressures.

In the longer term, we are likely to see continued higher labor, packaging, and production costs, which will feed through to food prices. Although grocery retailers will try to offset these price increases with promotional activities to entice shoppers, it will be a battle to win the hearts and minds of consumers.

The other two categories contributing to the downward movement in inflation are apparel and household durables and daily use items, which have seen a -1.29% and -0.62% MoM decline in prices, bringing down the YoY growth rate to +1.7% and +2.9% respectively.  Retailers have implemented their usual post-festive season discounts as budget-conscious consumers show reluctance to pay full prices.

We have also seen inventory levels continuing to come down for both apparel and household durables following the festive season, suggesting we are continuing to see a gradual return to normal business operations. However, inventory levels are still way above historical averages of 6-10 weeks of sales supply (at least in the apparel industry). As such, we are still not expecting prices to level off just yet.

Categories applying upward pressure on inflation in January

January registered upward inflationary pressures from three main categories: utilities, health, and housing (particularly owned housing).  These price increases have been driven by rising labor costs, which in turn are driven by the continued tightness in the labor market.

Housing has been a mixed category, with other lodgings seeing a significant fall in prices due to a decline in traveling for personal reasons as the festive season came to an end. However, owned property prices were on the rise in January, up +0.38% MoM and +5.86% YoY.

National average 30-year mortgage rates have held steady at 6.63% as of the end of January compared to 6.61% at the end of December, according to Freddie Mac. To add some context, mortgage rates were in the low 3% only two years ago. This, coupled with our expectation that the Fed will not be reducing interest rates in March, means consumers may be less likely to purchase homes in the current climate and might adopt a “wait-and-see” approach.

With this in mind, we have seen new residential home sales rising +4.4% YoY, while existing home sales fell -6.2% YoY, according to the Census Bureau and the National Association of Realtors (NAR). In addition, we have seen median prices of existing home sales rising +3.4% in December.

Graph 11: Truflation Housing Category Price Trends

However, while we are seeing an increase in the sales and a reduction in the prices of new homes, existing home sales generally account for roughly 80% of total home sales, and this is where we are seeing price increases. The high mortgage rates and home prices, coupled with historically low housing stock, continue to put homeownership out of reach for many – most notably first-time buyers who remain more pessimistic than ever about being able to afford a home as we start 2024.

One of the factors needed to drive further easing of housing prices are inventories, which would need to be considerably higher to ease the upward pressure on prices. Existing home stock was down -11.5% in December, according to NAR, dropping to 1 million units of unsold inventory. At the current sales pace, this sits at a 3.2-month supply, down from 3.5 months in December. For the inventory supply to be balanced, experts require 4-6 months of inventory, so the trend is currently going in the wrong direction.

Additionally, new residential construction levels remain significantly below historic averages, especially if we consider the population growth in the US since 1999. The number of new residential home permits that are yet to begin construction fell -11.3% YoY in 2023, compared to 2022, while new residential starts are down -8.9% YTD YoY, which suggests the chances of the inventory problem being resolved any time soon are low.

Graph 12: Housing Supply: New Residential Permits, Starts and Completes in 000s of Units

Source: US Census Bureau / New Residential Construction Report (all in 000s of Units)

The expectations are that inventory levels will not increase particularly soon, while the rapidly falling mortgage rates could create a surge in demand that would wipe away any inventory gains, causing home prices to rebound. It would be better from a housing perspective if rates cool at a metered pace, incrementally improving buyer opportunities over time rather than all at once.

Utilities prices increased only marginally in January, up +0.01% MoM and +2.42% YoY.  This mild increase was driven by electricity, which accounts for nearly 60% of the category, where prices were up +0.24% MoM and +5.60% YoY in January.   

Graph 13: Truflation Utilities Category Price Trends 

Electricity prices are unlikely to come down anytime soon, given the tighter supply of liquified natural gas which accounts for more than a third of America’s electricity supply, raising the costs for consumers. Natural gas has become more scarce as the US is shipping record amounts to Europe to replace lost imports from Russia, which have dropped dramatically amid the war with Ukraine. Additionally, labor shortages and tighter supplies have pushed up wages and other costs for utility companies. Finally, consumers will have to pay for a more stable grid as upgrades continue, driving up operational costs.  

According to a survey by Texas electric power company Payless Power, more than 75% of Americans are concerned about their ability to pay their utility or electricity bills, with 51% of respondents shopping less to budget for these higher costs and a quarter getting a second job to cover higher expenses.

Healthcare costs also continued to rise in January, up +0.38% MoM and +0.05% YoY. This was driven by several factors, including increased premiums, and higher deductibles and co-pays. As such, there is no single reason to blame for rising health costs. However, the key drivers are predominately service-related, such as the rising cost of insurance, medical services, and medical supplies. All these increases are being driven by the tight labor market and a general rise in the cost of resources:, with these trends looking unlikely to shift anytime soon.

The other categories applying inflationary pressures in January were communications, education, and recreation and culture. Here, price increases were also driven by the stubborn services element, which of course continues to be driven by the tight labor market.

About Truflation

Truflation provides a set of independent inflation indexes drawing on 30+ data partners/sources and more than 18 million product prices across the US. These indexes are released daily, making it one of the most up-to-date and comprehensive inflation measurement tools in the world. Truflation has been leveraging this measurement tool to predict the BLS CPI number, with four predictions spot on and all but one deviating by no more than 20 basis points since coverage was initiated.

APPENDIX A

Truflation Category Percentage Change Data

Month-over-Month and Year-over-Year

All Data is Based on January 2024