Inflation data released yesterday shows a lesser fall than had been widely expected, suggesting a more hawkish tilt on rate hikes will need to be forthcoming from the Fed.
Annualized inflation in the US has fallen for the seventh consecutive month in January to 6.4%, according to the Bureau of Labor Statistics (BLS).
Yet this was only a slender 0.1% decline from the 12-month inflation figure for December, as the CPI in January increased by 0.5%, a month-on-month 0.4% increase.
It was the smallest annual inflation rate rise since the end of October 2021, and there has been a significant decline from the June 9.1% peak made in 2022.
Core inflation, which excludes food and energy prices, remained stubbornly high at 5.6%, rising by 0.4% from December.
Overall, the US CPI is still significantly higher than the Federal Reserve’s target of 2% inflation.
Many analysts will be disappointed by the latest figures. Research by Dow Jones found that economists were expecting a 0.4% rise in prices in January, which would have resulted in annualized inflation at 6.2%.
Looking ahead to February the Cleveland Federal Reserve Bank has predicted that there will be a further monthly 0.57% rise in the CPI, which would leave the annualized inflation figure at 6.24%.
Federal Reserve to Continue Hawkish Path
The higher-than-expected US inflation potentially could further harden the Federal Reserve’s stance on interest rates, having slowed the latest rate rise to 0.25% up to 4.75% on 1st February, the smallest rise since March last year.
The Federal Open Market Committee was clear that even though the pace of rate rises were eased, the cycle of rate raising was not going to be immediately halted.
Federal Reserve Chairman Jerome Powell has previously said that he does not anticipate any rate cuts throughout the course of the year.
The next interest rate decision from the Fed will be taken on 22nd March.
In response to the smaller annual decrease in inflation for January, the yield for the US 2-Year Treasury bond increased to 4.63%, after falling to 4.49% in the minutes leading up to the announcement of the CPI figures.
The hike in the yield price is perhaps a reflection of an increased expectation that interest rates will remain high for now.
Marcus Brookes, chief investment officer at Quilter Investors, reflected: “While inflation in the US continues its gradual march back down from its recent highs, it cannot be claimed to be job done just yet for the Federal Reserve as the print comes in above expectations.”
“As a result, while rate hikes may be off the cards soon, rate cuts should not be taken as a given later in the year.”
“The Fed will be determined not to take its foot off the gas too early and miss the soft landing it is hoping for. With inflation falling, but at a much more gradual pace than on the way up, the opportunity for policy misstep is greater.”
Shelter, Food and Energy Prices Increase
Rising shelter prices were the largest contributor to the monthly increase in US CPI.
This rose by 0.7%, accounting for almost half of all the January price increases, as the rent index and the owners' equivalent rent index each rose 0.7% since December.
Overall shelter prices have spiraled upwards by 7.9% on an annualized basis.
Exorbitant food prices continue to hurt the American consumer, as the food index climbed by a monthly 0.5%, with annual food prices now just over the 10% mark.
For energy costs there was a different pattern, as they increased in January having fallen for the two previous months.
Gasoline prices increased by 1.9%, having significantly declined in December by 7.2%.
The energy index has increased by 8.7% annually, with consumers hit by a rise in electricity and natural gas of 11.9% and an eye-watering 26.7% respectively.
US Dollar Makes Gains
Currency markets appeared to be initially uncertain how to digest the US inflation figures in the hours after the BLS released the figures.
Yet with an increasing prospect of interest rates remaining high, the greenback soon found strength.
Against the UK Pound the US Dollar sank to buying £0.81 before rising to just under £0.83.
There was an immediate rise in the USD/JPY currency pair with the greenback rising to a peak of ¥133 before falling to ¥132, then rising as high as ¥133.4.
Against the Euro, there was a more marginal appreciation by the US Dollar.