The U.S. Bureau of Labor Statistics (BLS) released the January Consumer Price Index (CPI) report to eager ears this morning. The crucial inflation data came in slightly worse than expected, with headline inflation up 3.1% annually in January, below December’s 3.4% reading but above projections of a 2.9% price jump. So-called “core” inflation, which excludes the volatile Food and Energy categories, came in unchanged from December, at a 3.9% year-over-year, higher than expectations of 3.4%,
Today’s data is undoubtedly a loss for Wall Street, which was hoping for a stronger trend of continued disinflation that had persisted the past few months. Indeed, stock futures are down across the board this morning as investors price in a higher chance that the Federal Reserve will hold interest rates steady in March and perhaps the entire first half of the year.
According to the CME FedWatch Tool, interest rate traders are pricing in an 86.5% chance the Fed holds rate steady at the March policy meeting, with a nearly 60% chance of the same result in May.
While the Fed champions the Personal Consumption Expenditures (PCE) report as its preferred inflation gauge, the two tend to have a cat-and-mouse effect in which they follow similar trends. As such, today’s report may prove an ominous indicator that the fight against inflation may not come to the smooth conclusion many economists had hoped.
Stubborn January CPI Report Likely to Delay Rate Cuts
If you recall, at the January rate decision, Fed Chair Jerome Powell told reporters that Fed officials want to see more “good data” that inflation is coming down before opting to cut rates. As such, today’s report will likely push the Feds further into hawkish complacency as it awaits further inflation data before affecting any rate changes. As Powell said in January:
“It’s a good story, we have six months of good inflation but, and you know this, you can look behind those numbers and see a lot of its been coming from goods inflation, for example, and goods inflation running significantly negative. It’s a reasonable assumption that over time goods inflation will flatten out over time probably approximate zero that would mean the services sector would have to contribute more,”
Interestingly, Powell’s prediction proved largely accurate in January, at least, as it pertained to the tradeoff between goods and services inflation. Energy prices fell 0.9% from December to January, while Food prices increased 0.3% over the same period.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
