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Inflation dropped just slightly in January

JUANA SUMMERS, HOST:

Inflation is coming down, but not very quickly. Today, we learned the inflation rate in January was 6.4%, down only slightly from the month before. Stubbornly high inflation means that the Federal Reserve is likely to keep raising interest rates, at least for the next few months. NPR's Scott Horsley joins us now. And Scott, what does this new inflation report tell us about which way prices are headed?

SCOTT HORSLEY, BYLINE: It tells us that prices are settling down, but not as quickly as we'd like. The annual inflation rate has fallen for seven months in a row after hitting a four-decade high last June, but it's still higher than we were used to back before the pandemic. Just between December and January, prices jumped half a percent. That was largely as a result of rising rent and food and gasoline prices. Kathy Bostjancic, who's chief economist at Nationwide, says that means the Federal Reserve is likely to push interest rates even higher in the coming months as it tries to wring these high prices out of the economy.

KATHY BOSTJANCIC: The Federal Reserve is a long way away from mission accomplished. They want to see that, you know, continued progress, and they certainly will be concerned if you see some stalling out.

HORSLEY: Now, progress in lowering inflation didn't stall out in January, but it certainly slowed. And getting inflation all the way down to the Fed's target of 2% could be even more difficult.

SUMMERS: And Scott, why is that?

HORSLEY: Well, some of the temporary or one-off things that were driving inflation have already been dealt with. For example, the supply chain snarls that caused a lot of price spikes early in the pandemic have started to come untangled. As a result, we've seen a drop in the price of things like used cars. Gasoline prices, which soared to record highs after the Russia invasion of Ukraine, have come back to Earth. And housing costs are still high, but they're expected to come down as cheaper rents that we can already see in the market start to show up in the official data. That leaves the price of services - things like auto repair, which has jumped 23% in the last year. The Fed's keeping a close eye on those prices, and they could be harder to control because so much of the price of services is driven by the cost of labor. And that means wages, which typically move in only one direction.

SUMMERS: Have rising prices put a damper on people spending?

HORSLEY: Somewhat. Spending did tail off at the end of last year, but forecasters think we could see a nice rebound when the January retail numbers come out tomorrow. Remember, we've added a ton of jobs over the last 12 months. And over the last seven months, wage growth has actually outpaced inflation. Bostjancic says that means a lot of people have money to keep spending if they want to.

BOSTJANCIC: Consumers have more purchasing power than we thought as we ended 2022, in large part because the hiring was so strong. My sense will be that consumers are going to spend a lot of that.

HORSLEY: A possible clue to that willingness to spend was buried in today's inflation report, and it's this, Juana. The price of men's underwear jumped 5.5% last month. That suggests pretty robust demand. Now, former Federal Reserve Chairman Alan Greenspan used to consider men's underwear a kind of economic bellwether. It's generally out of sight. Nobody knows if you're wearing a new pair. So if you're gloomy about the economy, you make do without. You only splurge when you're feeling confident. A 5.5% price jump in a single month suggests a lot of men are feeling pretty upbeat about the economy. Women's underwear prices - up only 2% last month.

SUMMERS: Huh, who knew? NPR's Scott Horsley, thank you.

HORSLEY: Happy Valentine's Day. Transcript provided by NPR, Copyright NPR.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.