Dive brief:
- Inflation rose in January as falling prices for clothing and used vehicles failed to offset gains in the costs of housing, transportation and other services, prompting traders to postpone beyond May its forecast to reduce the Federal Reserve’s main interest rate from a 23-year high. .
- The basic consumer price index, which excludes volatile food and energy prices, rose 0.4% last month compared to 0.3% in December, and increased by 3.9% annually, the same as the previous month. A 0.6 percent increase in housing costs in January drove most of the increase in core inflation, the Bureau of Labor Statistics said.
- The data reveal “inflation hotter than expected,” Julia Crowned, president of MacroPolicy Perspectives, told X, formerly Twitter. “Housing remains an enigma, with OER [owners’ equivalent rent] reaffirmation and rent cooling noticeably – leading indicators suggest both should cool, but it’s taking its sweet time to appear! she said
Diving knowledge:
Answering Based on the inflation data, interest rate futures traders cut the likelihood that the Fed will cut the federal funds rate from its current peak on May 1 from 52% to 34%, according to the CME FedWatch tool.
Traders now see a 52% chance that the central bank will cut the benchmark interest rate by a quarter of a point on June 12. The Fed is currently holding the prime rate in a range between 5.25% and 5.50%.
Members of the central bank’s Federal Open Market Committee have indicated that they are done raising borrowing costs, but said that a steady easing of price pressures must precede any easing of policy.
“Almost everyone on the committee is in favor of cutting rates this year,” Fed Chairman Jerome Powell said at a Jan. 31 press conference. “But the timing of that will be related to our confidence that inflation is on a sustainable path to [the Fed’s inflation goal of] 2%,” he said.
Consumers’ expectations of inflation suggest the central bank may need more time than markets anticipate to gain confidence that price pressures are steadily easing, according to Douglas Holtz-Eakin, president of the American Action Forum.
Consumers expect inflation of 3% in a year, according to the average result of a New York Fed January survey published on Tuesday, matching December’s result.
Current one-year inflation expectations, while down from 6.8% in June 2022, “suggest that the Fed will remain accommodative for an additional period as the 2% threshold is met.” Holtz-Eakin said in a blog post on Tuesday.
Persistent housing cost inflation, which rises and falls more slowly than other categories of goods and services, supports the view that borrowing costs may remain higher than markets anticipate.
Accommodation prices rose by 6% in the 12 months to January. Powell has repeatedly said that a sustained decline in this category is essential to achieving the 2% inflation target.
Food prices rose 0.4% in January, while transportation and medical care rose 1% and 0.7%, respectively.
Not all inflation data is bleak: Energy prices fell 0.9% last month and the price of used cars and trucks fell 3.4%.
