US Inflation Tops Forecasts, Dimming Chances For Fed Rate Cuts
Economists see the core gauge as a better indicator of the underlying inflation trend than the overall CPI that includes often-volatile food and energy costs.
Shoppers carry bags in Walnut Creek, California. (Photographer: David Paul Morris/Bloomberg)
Underlying US inflation last month rose by the most since March, supporting the Federal Reserve’s cautious approach to lowering interest rates.
The so-called core consumer price index — which excludes food and energy costs — increased 0.4% in January after a 0.2% advance in December, Bureau of Labor Statistics figures showed Wednesday. From a year ago, it rose 3.3%.
Economists see the core gauge as a better indicator of the underlying inflation trend than the overall CPI that includes often-volatile food and energy costs. The headline measure rose 0.5% from December and 3% from the year before. The BLS said nearly 30% of the advance was due to shelter.
Wednesday’s report serves as further evidence that inflation progress is in danger of reversing — which, combined with a solid labor market, will likely keep the Fed on hold for the foreseeable future. Policymakers are also awaiting further clarity on President Donald Trump’s policies, particularly tariffs, which are already causing consumer inflation expectations to rise.
Stock futures dropped while Treasury yields and the dollar spiked after the report. Interest rate swaps showed traders are only expecting one quarter-point Fed rate cut this year. Before the CPI report, traders were leaning toward two cuts.
Speaking before the Senate Banking Committee on Tuesday, Chair Jerome Powell reiterated the central bank is in no rush to lower interest rates. While he wouldn’t comment on trade policy, he said that he and his colleagues will have to consider the “net effect” on the economy of all the administration’s policies, including taxes and immigration. He’s due before a similar committee within the House on Wednesday.
The increase in the CPI was led by grocery prices, with two-thirds of that advance due to higher egg prices. The more-than 15% jump was the largest since June 2015. Within the core index, prices rose for prescription drugs, car insurance and airfares. Costs of hotel stays and used cars also climbed, possibly in the aftermath of deadly wildfires in Los Angeles.
Shelter prices, the largest category within services, advanced 0.4% in January. Owners’ equivalent rent and rent of primary residence — subsets of shelter — both rose 0.3%.
The report incorporated new weights for the consumer basket to try to more accurately capture Americans’ spending habits, which resulted in minimal revisions to the CPI last year. Some Fed officials have noted how inflation tends to come in higher early in the year when businesses implement outsize price increases.
