Is the US suffering from seasonal inflation disorder?

Federal Reserve chair Jay Powell appeared to have two objectives when giving evidence to Congress last week. Steer clear of politics and do not upset the president. He largely succeeded.

On the day of a poor set of US consumer price inflation data for January, Powell said the Fed had made “great progress” in getting inflation down but had not quite met its goals. He was quite right about the former, with US CPI inflation down from 9 per cent in June 2022 to 2.4 per cent in September 2024, but the latest data was bad.

US headline CPI inflation rose in January on a 12-month, six-month, three-month and one-month basis and almost all measures of core inflation were higher in January than in December over every time period. My favourite measure in the chart below is FT core inflation, which combines all the others in a statistically optimal way — this rose across all time periods on an annualised basis. It is generally hovering at an annualised rate of a little below 3 per cent.

One question raised by many analysts after the data release was whether the Bureau of Labor Statistics was struggling to seasonally adjust the data because companies raised prices more in January than they traditionally do in the first month of the year.

The chart below shows the month-by-month change in US prices, with the most recent data shown in red. Over a long period, they rise fastest in the first three months of the year, are pretty stable in spring and summer and go up again in the autumn ahead of price cuts in December. Seasonal adjustment smooths out this pattern over a long period of data.

The chart shows, however, that January 2025’s monthly price rises were hot on any historical basis and remained high after the BLS’s latest seasonal adjustment.

With inflation having been elevated in recent years, this pattern might simply show the overall level of price rises recently. You can eradicate some of that noise by subtracting the average monthly inflation rate of the previous 12 months to remove general price trends. January 2025 was still a big month for US price rises.

There does therefore appear to be some residual seasonality in the data, with companies more likely to raise prices in January than previously. The evidence is stronger for headline inflation (you will need to click on the chart) than the traditional core measure, excluding food and energy, suggesting that it is exactly some food and energy prices that are now reset higher in January.

Is this pattern also repeated in the Eurozone?

Not really. On the same basis as in the previous chart, the monthly seasonally adjusted Eurozone core measure of inflation was inside a normal range in January 2025. Although the headline measure was high, there is less of a trend in Europe for big seasonally adjusted price rises at the start of the year.

What does residual seasonality mean?

Most analysts last week largely refrained from excusing the poor CPI data on the basis of seasonal adjustment failures and noted there was something real behind the numbers.

In any case, residual seasonality would only mean that the January data was overstated while inflation in other months would be too low. As Powell noted in his press conference after the January Fed decision: “At the end of the day, it comes down to 12-month inflation because that takes out the seasonality issues that may exist.”

And if companies are finding it easier to raise prices in January than previously, there are three main potential culprits.

• Corporate market power enabling companies to push prices higher without a consumer backlash. If true, this would be a version of the “high inflation” trap that the Bank for International Settlements warned about in 2022 with companies and households expecting and accepting annual price increases. It would require aggressive monetary policy to prevent companies continuing the practice every year.

• Tariff forestalling with companies raising prices in January in anticipation of tariffs being applied later in the year when their actions would attract more scrutiny.

• “Menu costs” reflecting more lumpy and occasional price rises to minimise the administrative costs of increasing charges frequently.

It is hard in advance to distinguish between these possibilities. But I am sceptical about the scale of “menu costs”, especially in a digital world, where prices change rapidly and printing costs are low.

As an anecdote, I have been photographing a local restaurant in Camden Market, London, which has long offered an all-you-can-eat buffet. In the UK’s low inflation years before 2021, it displayed the price in expensive illuminated signage and charged £8.80 in September 2021.

The pictures below show the evolution of prices and the difficulty the restaurant had in updating its frontage. Last Friday, the price for the same buffet was £14.90 — a 69 per cent increase. In the UK, the Office for National Statistics measures the national increase in restaurant prices over the same period at only 24 per cent.

For this restaurant, the costs of changing signage would have been high, but that did not stop it applying rapid and frequent price rises since 2021.

Bessent’s bet bombs

It took one day.

Last Tuesday I wrote that US Treasury secretary Scott Bessent had made a foolhardy bet in saying that President Donald Trump was not calling for the Fed to lower rates and was, instead, focused on bringing down 10-year US government borrowing costs.

On his Truth Social platform, the president responded on Wednesday — you guessed it, calling for the Fed to lower rates.

More pertinently, if you are ever tempted to be the person who interprets Trump’s thoughts in a reasonably coherent form, stop. Like Bessent, you will be humiliated.

What I’ve been reading and watching

• For more on Trump’s latest “reciprocal” tariff plan that would destroy the Most Favoured Nation concept which has underpinned rules-based international trade, the FT has a great explainer and I can wholeheartedly recommend Alan Beattie’s Trade Secrets newsletter for a more acerbic version.

• Ed Luce fears that Trump is undermining the US economy in the latest Swamp Notes newsletter, with some reasonably sobering lessons from Brexit added by me.

• Mario Draghi, former ECB president, meanwhile called on Europe to free itself of the burdens holding back economic progress.

• The plight of Syrians who are desperately short of banknotes is deepening, along with the irony that its central bank has to get more printed from Russia.

A chart that matters

Gold has become the prime Trump trade, as a potential safe haven in a dangerous world. Private investors have sought to extract the shiny metal from the Bank of England’s vaults and shift it physically to the US ahead of possible tariffs.

Many central banks, which fear possible financial sanctions as applied to Russia, are seeking to hold more of their reserves in gold, as shown in the chart below. For an explainer, do read Andrew Whiffin’s piece on the FT’s Monetary Policy Radar.