NEW YORK (Reuters) – U.S. consumer prices increased more than expected in January amid rises in the costs of shelter and healthcare, but the pick-up in inflation likely does not change expectations that the Federal Reserve will start cutting interest rates in the first half of this year.
The consumer price index (CPI) increased 0.3% last month after gaining 0.2% in December, the Labor Department’s said on Tuesday. In the 12 months through January, the CPI increased 3.1%. That followed a 3.4% advance in December. Economists polled by Reuters had forecast the CPI gaining 0.2% on the month and rising 2.9% year-on-year. The annual increase in consumer prices has moderated from a peak of 9.1% in June 2022.
STOCKS: U.S. stock index futures turned 1.2% lower
BONDS: U.S. Treasury yields jumped after the data, with 2-year note last at 4.594%, and the 10-year note at 4.2790%FOREX: The dollar index turned 0.6% higher
CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE, NC
“Inflation staying sticky is everyone’s biggest fear and this report is showing its not going down. Most of the reports have been really encouraging. This one is stalling. The knee- jerk reaction is for stocks and bonds to sell off. That makes sense. Then we’ll wait for the next report and if that’s lower this will turn out to be just a blip.”
“If you look under the hood. The Fed is looking at core services minus housing. That’s actually gone up. It makes you worry that inflation is going to be more sticky than we had hoped and that rates will stay higher for longer.”
“This puts a nail in the coffin for March and opens the possibility that May is off the table for rate cuts as well.”
“This could easily be a one off. But for all those people saying rates are too high, he’s got to cut now. What are we waiting for? This is why. This is exactly what Powell was worried about.”
QUINCY KROSBY, CHIEF GLOBAL STRATEGIST, LPL FINANCIAL, CHARLOTTE, NC
“The hotter report takes the possibility of any Fed cut in March 20 down markedly. The question is whether or not May 1 remains a possibility if the next series of inflation related data do not edge lower than expected.”
RUSSELL PRICE, CHIEF ECONOMIST, AMERIPRISE FINANCIAL INC, TROY, MICHIGAN
“Two primary issues really influenced the overall report and that was shelter, costs heated up a little bit more in the month of January to their fastest rate of month-over-month growth since last February.
“Economists, such as myself, have been looking for that number to decline and over the last few months it’s actually been hot. The other factor that may have had a influence is wage gains across the board because 22 states implemented minimum wage hikes beginning Jan. 1, and that likely was passed on to consumers by many businesses.
“The Fed has indicated that they’re going to take it slow, and I think today’s data as well as last week’s employment data, shows that they’re right in doing so. Their message, I think, has been correct and the markets message of cuts coming sooner seems to be incorrect.”
MICHAEL GREEN, CHIEF INVESTMENT STRATEGIST, SIMPLIFY ASSET MANAGEMENT, NEW YORK, NY
“This CPI likely leads to the Fed being much slower to respond.”
“It’s very negative for stocks that are interest rates sensitive, particularly small stocks that are facing a requirement to refinance their debt. They’re looking at conditions under which they’re not going to get the debt relief that they had hoped.”
“Lagging components, like insurance on automobiles and homes and the cost of rent are now dominating the index, while the remaining components effectively suggest that you’re looking somewhere around one and a half percent inflation rate, which is consistent with the more contemporary metrics of inflation.”
“This is an unfortunate situation in which the data that the Federal Reserve is going to receive reinforces perception of persistent inflation. We’re looking at a Fed that feels trapped and in the economy candidly continues to decelerate, at least for the majority of companies.”
SUBADRA RAJAPPA, HEAD OF US RATES STRATEGY, SOCIETE GENERALE, NEW YORK
“The expectation at least was that over time you should see an easing of shelter costs, and you’re just not seeing that. If anything, shelter costs ticked up in the report that we got today. The question really is that for Fed policy, this kind of pushes out the timeline more towards a mid-year rate cut, as opposed to anything earlier, especially given the strength in other areas like employment.”
“There’s not any clear urgency for the Fed to act, so I think as long as we continue to get pretty decent employment figures and growth has also been surprising to the upside… You’re just not seeing that slowdown in the fourth quarter growth materialize, or in the data that we’ve gotten so far in the first quarter as well. So, I think strong growth, strong employment and inflation remaining somewhat sticky… the Fed’s probably going to remain patient.”
BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN
“A slightly hot CPI really sent a chill down the spine of investors. The Fed doesn’t have a coherent set of criteria for cutting, so for all we know this resets the clock. If cutting is a confidence game, we don’t know when enough progress is enough or whether mild setbacks undermine their confidence. No wonder bond volatility is elevated.”
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK
“It’s a hotter-than-expected report and it’s part of what the Fed has been alluding to when it says it’s too early to say that inflation has been beaten.”
“Inflation is in the pipeline, and this negates the any possibility of the Fed cutting rates in of March, and the hawkish Fed metric is likely to continue.”
“And as far as the market is concerned, obviously we see NASDAQ falling apart here. It’s negative news for the markets and negative news for the Fed.”
“If this keeps up with another month or two of inflation staying high, you can kiss a June (rate cut) goodbye and we’re probably looking at September.”
(Compiled by the Global Finance & Markets Breaking News team)