Inflation came in hotter than expected in January, a sign that the Federal Reserve will continue to hold interest rates high for longer.
The Consumer Price Index (CPI), a key inflation gauge, rose 0.3% in January and 3.1% year over year, the U.S. Bureau of Labor Statistics reported on Tuesday. Core CPI, which excludes volatile food and energy prices, also rose more than expected, climbing 0.4% in January and 3.9% over the last 12 months.
Analyst expectations for the headline and core CPI readings were 2.9% year over year and 3.7% year over year, respectively.
“Higher January CPI inflation is another reason why the FOMC will not cut the fed funds rate at its next meeting on March 20,” wrote PNC chief economist Gus Faucher in an email sent to The Dallas Express. “The committee wants to see more progress on inflation before it feels comfortable cutting its policy rate.”
Faucher suggested the reacceleration in January inflation was “likely an aberration.”
“Inflationary pressures in the U.S. economy are gradually easing,” he wrote. “In particular, more slack in the labor market and slower rent growth will contribute to a slowing in services inflation this year.”
While inflation might be slowing, Americans are still feeling the squeeze on their wallets and credit cards.
“…[I]t’s important to remember that a lower inflation rate does not mean that prices of most things are falling — rather, it simply means that prices are rising more slowly,” said Lisa Sturtevant, chief economist at Bright MLS, per CNBC. “Consumers are still feeling the pinch of higher prices for the things they buy most often.”
Shelter and food prices saw the biggest inflationary increase in January, according to the report.
The index for shelter rose +0.6% and contributed over “two-thirds” of the monthly all-item increase, said BLS. The index for food rose +0.4%, buoyed by a +0.4% increase in food at home (groceries) and a +0.5% increase in food away from home (dining out, fast food, etc).
In contrast, the energy index fell 0.9% in January due mostly to a decline in the gasoline index.
January’s inflation reading was not what Wall Street had hoped for.
“The much-anticipated CPI report is a disappointment for those who expected inflation to edge lower, allowing the Fed to begin easing rates sooner rather than later,” said Quincy Krosby, chief global strategist at LPL Financial, per CNBC. “Across the board numbers were hotter than expected, making certain that the Fed will need more data before initiating a rate cutting cycle.”
Compared to the three to four rate cuts penciled in by FOMC (Federal Open Market Committee) participants in the most recent Summary of Economic Projections, Wall Street is forecasting the Fed will approve six rate cuts by the end of 2024, as reported by The Dallas Express.
However, the probability that the Federal Reserve will approve its first rate cut in March or May dropped following Tuesday’s report, according to the Fed Rate Monitor Tool.
Although inflation rose higher than expected, Faucher said PNC still expects the FOMC to cut the fed funds rate by 25 basis points at the May meeting.