January CPI Hotter Than Expected, Tariffs Could Make It Worse
Introduction
The U.S. Bureau of Labor Statistics released the January 2025 Consumer Price Index (CPI) and Producer Price Index (PPI) figures the week of February 9th with both coming in hotter than expected.
CPI
The CPI was up 3% year-over-year, far above the Federal Reserve Bank’s 2% target. What gives many pause for concern is the CPI in January was up for the fifth month in a row. The CPI registered 2.4% growth in September, 2.6% in October, 2.7% in November, and was up 2.9% in December. Not only was the January figure higher than most economists expected on a year-over-year basis, it was up .5% month over month, which if extrapolated over the next 12 months would result in a 6% annual inflation rate.
Federal Reserve Bank Chairman Jerome Powell, when testifying before the U.S. Congress shortly after the January CPI data was released, was non-committal and presented a wait and see position on a rate increase. The chairman’s testimony left many economists wondering whether the Fed will cut interest rates before the end of 2025 or wait until 2026 to do so.
The January year-over-year CPI report showed many individual categories outpaced the annual year-over-year CPI growth rate of 3%. For example, dining out was up 3.4%, with many individualized food items like coffee, up 7.1%; bacon, up 6.1%; lettuce, up 3.3%; ham, up 3.6%; and candy, up 5.4%. In addition, shelter was up 4.4%, automobile insurance, up 11.8%, motor vehicle repairs, up 7.4%, and airline tickets, up 7.1%, year-over-year in January.
Many in the financial community are nervous regarding the direction of the economy, inflation, and interest rates as the CPI has moved upward in the last year and is still more than double the 1.4% CPI President Biden inherited in January of 2021. Perhaps of greatest concern is the 30-year fixed home mortgage interest rate that reached a record low of 2.65% in January of 2021 and today is 7.02%, according to Bankrate.
PPI
The January Producer Price Index was equally disappointing. The PPI, up 1.1% in December 2023, finished December 2024, up 3.3% year-over-year, with the growth rate tripling in one year. PPI measures wholesale prices. An increase in the PPI most often leads to an increase in consumer prices in the months to follow…this certainly seems to have happened in 2024. The January PPI was up 3.5% year-over-year, higher than an expected 3.2%, with the month-over-month PPI increasing .4%.
Many individual items outpaced the overall PPI in January, 2025 with year-over-year diesel fuel prices up 10.4% and eggs for fresh use were 44% higher month-over-month and up 186.4% from a year ago. The massive jump in egg prices was due to farmers destroying millions of chickens throughout 2024 to date in an attempt to eradicate avian flu.
Tariffs could make the situation worse
With less than 30 days left in the tariff reprieve with Canada and Mexico, new international tariffs on steel and aluminum being discussed, and ‘Reciprocal’ Tariffs being formulated, many key U.S. industries are worried and could be negatively impacted.
The following are two concerned U.S. industries.
An estimated 16 million people are employed in the U.S. hospitality industry. They work in various jobs for businesses ranging from hotels, restaurants, bars and grills to amusement parks, theaters, convention centers and stadiums. While over 3 million individuals are employed in the manufacturing, distribution, and/or sale of motor vehicles and/or parts in the U.S., according to the U.S. Bureau of Labor Statistics (BLS).
What would happen if tariffs on steel and aluminum are imposed? Likely, higher prices would make it more costly to build new and/or maintain existing hotels, restaurants and bars as well as to manufacture motor vehicles and many of their component parts. Increased trade restraints between the United States and Canada or the United States and Mexico, if not averted, could be especially difficult for the U.S. hospitality and auto industries.
Consider, with spring planting in America beginning soon, the fact that over 80% of U.S. fertilizer is imported from Canada, could present a major problem. Canada is the primary U.S. source for potash and a significant supplier of nitrogen-based fertilizer derived from natural gas. A substantial increase in the cost of fertilizer, will likely lead to a significant increase in food prices in 2025.
In 2024, the United States imported roughly $44 billion in agricultural-related items from Mexico ranging from beverages, vegetables, fruits and nuts to cereals, sugar, flour and meat. Tariffing Mexican agricultural products will certainly lead to higher prices on the table at home and on the table at your favorite local restaurant, bar, or grill. They could simultaneously reduce the profitability of and employment in the hospitality industry, which has already faced the challenge of soaring inflation on food and labor over the past three years.
Conclusion
Americans have confidence in the Trump administration’s vision to deregulate the U.S. economy, reduce the average tax burden, while increasing economic growth. However, we are concerned that the rising inflation rate President Trump inherited will only get worse in many American industries if trade restraints are used especially against Canada and Mexico.