The U.S. consumer price index rose 6.4 percent in January compared to a year earlier, a smaller-than-expected decline, in data that will add to concerns about persistently high inflation in the U.S. economy.
Economists expect a deceleration in the annual CPI to 6.2 percent from the 6.5 percent pace recorded in December, according to consensus forecasts published by Reuters.
Excluding energy and food prices, the “core” CPI measure rose at an annual rate of 5.6 percent in January, well below the 5.7 percent rise in the previous month. This compares with economists’ expectations of a 5.5 percent year-on-year gain.
January’s inflation data is closely watched as an important guide for investors, economists and the US central banker. An unexpected jobs report for last month fueled expectations that the Federal Reserve will need to be more aggressive in tightening monetary policy to cool the economy.
“The Fed will decide not to stop the gas too early and miss the desired soft landing. With inflation falling, but at a slower pace than rising, the opportunity for policy missteps is greater,” said Marcus Brookes, chief investment officer at Quilter Investors.
“Today’s inflation numbers remind us of all the difficulties we are facing, and we are still a long way from declaring victory,” he said.
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Trading on Wall Street was volatile, with US stocks and government bonds swinging between gains and losses following the hotter-than-expected CPI announcement.
The S&P 500 was 0.3 percent higher in early trading Tuesday, while the tech-heavy Nasdaq Composite rose 0.6 percent.
The two-year Treasury yield, which tracks interest rate expectations, rose 0.05 percentage points to 4.58 percent, reflecting the decline in prices.
The move comes as prices on futures markets suggest that investors expect US interest rates to peak at 5.25 percent in July, before falling to 5 percent in December – indicating one rate cut before the end of the year. From the beginning of February, two pieces are priced for 2023.
On a monthly basis, the CPI rose 0.5 percent last month, compared with a 0.1 percent rise in December. The “core” measure increased at an unchanged pace of 0.4 percent.
Energy prices rose 2 percent month-on-month, reversing declines posted in December and November, while food and clothing costs rose faster than the previous month.
Shelter prices rose at a pace of 0.7 percent, slightly slower than in December, but still at a rapid clip for costs that represent a large share of disposable income for many households. However, used car prices continue to fall, and new car prices rise rapidly.
“Shelter inflation may have peaked, which will allow the Fed to breathe a sigh of relief. But other components of the core inflation index are moving higher,” wrote economists at Lazard. “To pause the tightening cycle, The Fed needs to see more muted price gains and less tightening in the labor market. Expect both to continue.
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The Federal Reserve has raised interest rates from near-zero to a target range of between 4.5 and 4.75 percent in the past year. As inflation has eased since the peak of late summer, the central bank has slowed the pace of its rate hikes, from an increase of 0.75 percentage points and 0.5 percentage points in the second half of last year to 0.25 percentage points a month.
But Fed officials continue to insist that the fight against inflation is far from over, even as some economists and investors predict that they may pause interest rate hikes and may begin cutting rates by the end of the year.
“We are still far from achieving price stability and I expect that we will need to tighten monetary policy further to bring inflation down to our goal,” Fed governor Michelle Bowman said at a meeting of the bankers’ community in Florida on Monday.
“Continued tightness in the labor market led to inflationary pressures, although some components of inflation moderated due to improvements in supply-side factors. The higher inflation remains, the more households and businesses can expect higher inflation in the long term,” Bowman said. . “In that case, the FOMC’s task of lowering inflation will become more challenging.”
The continued strength of the US labor market combined with gradual inflation has raised hopes that the economy could experience a “soft” landing, avoiding a recession even as monetary policy tightens. But Fed officials have always warned that these results cannot be guaranteed.
If inflation proves to be more stubborn than expected, the central bank will have to raise interest rates higher for a longer period of time to reduce price pressures to an average target of 2 percent. This, in turn, can lead to a bigger hit to output and employment in the future.
Economists and officials are particularly concerned that inflation in the services sector has been difficult to control, compared to inflation for goods, which has declined more quickly.