US Consumer Prices Exceed Expectations in January, Prompting Fed Rate Cut Speculation
The latest data from the Bureau of Labor Statistics has revealed that US consumer prices rose more than expected in January, sparking speculation about a potential rate cut by the Federal Reserve. The Consumer Price Index (CPI) increased by 0.3% over the previous month and 3.1% over the prior year, slightly surpassing December’s figures. While this indicates a deceleration from December’s annual gain of 3.4%, it still exceeded economist forecasts.
The core CPI, which excludes the more volatile costs of food and gas, saw prices climb by 0.4% over the previous month and 3.9% over the last year. These higher core inflation readings were largely attributed to sticky shelter inflation, with the shelter index rising by 6% on an unadjusted, annual basis and 0.6% month over month. Notably, the indexes for rent and owners’ equivalent rent also experienced increases.
Other indexes that rose in January included motor vehicle insurance and medical care, while used car prices decreased by 3.4% from December to January and 3.5% on an annual basis. The food index increased by 2.6% in January compared to the previous year, with food prices rising by 0.4% from December to January. Energy prices continued to fall, with a decline of 4.6% annually and 0.9% month over month.
Investors closely monitored these inflation figures for insights into the Federal Reserve’s potential actions regarding interest rates. Following the release of the data, markets priced in a 94% chance that the central bank will maintain steady rates at its upcoming meeting, up from 84% the previous day.
However, despite hopes that the Federal Reserve would begin cutting interest rates due to the core Personal Consumption Expenditures (PCE) price index consistently falling below the 2% target, the latest report may temper those expectations. Eugenio Alemán, chief economist at Raymond James, described it as a “bad report” for those anticipating a rate cut in the near future.
Ellen Zentner, chief US economist at Morgan Stanley, also expressed a similar sentiment, stating that the acceleration in core PCE aligns with their view of a bumpy path ahead. Zentner believes that sequential prints in the first quarter of 2024 will be higher than those of the previous six months, potentially delaying the decision to start cutting rates until June.
Citi warned that the higher-than-expected inflation print is likely to impact the recent stock market rally. Stuart Kaiser, head of Citi’s US equity trading strategy, noted that while strong core CPI is not a game-changer, it may lead to a short-term pullback. However, he also emphasized that the economy remains strong, which limits the extent of the potential pullback.
Overall, the January inflation figures have sparked speculation and debate about the Federal Reserve’s next move regarding interest rates. With mixed opinions from economists and analysts, it remains to be seen how these numbers will shape future monetary policy decisions.
About the Author:
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at [email protected].