Another slightly hotter-than-expected consumer price index (CPI) print did little to steer market strategists and experts away from their belief that inflation is still broadly slowing. But Tuesday’s report of a small acceleration in consumer prices did demonstrate that the path to 2% inflation could be muddy, and it certainly seemed to snuff out any hopes of a March interest-rate cut by the Federal Reserve.
The U.S. Department of Labor said on Tuesday that January’s consumer price index, which measures the change in prices on a variety of consumer goods and services, came in a touch higher (0.3%) compared to December on a seasonally adjusted basis. Year-over-year, price growth was up 3.1%—a deceleration from the previous month’s 3.4% YoY growth, but still hotter than estimates.
Meanwhile, “core” CPI—a measurement that backs out food and energy costs, which are more volatile than the other costs tracked by the Labor Department—was up by 0.4% month-over-month, and 3.9% YoY.
Most of these figures came in ahead of estimates from economists surveyed by Dow Jones:
- MoM CPI: +0.3% (vs. +0.2%)
- YoY CPI: +3.1% (vs. +2.9% est.)
- MoM Core CPI: +0.4% (vs. +0.3% est.)
- YoY Core CPI: +3.9% (vs. +3.7% est.)
Tuesday’s CPI report showed yet another significant rise in shelter costs, which were up 0.6% month-over-month and 6.0% year-over-year.
“The big picture is that disinflation is happening, but CPI inflation is still elevated because of lagging official shelter prices,” says Sonu Varghese, Global Macro Strategist, Carson Group. “Over the last three months, headline inflation is running at an annualized pace of 2.8%, whereas CPI for all items ex-shelter is running at a rate of just over 1%.”
Gargi Chaudhuri, Head of iShares Investment Strategy, Americas, adds that services inflation continues to be sticky.
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“Every single major component of services was hotter than the previous month. Core services ran at its hottest MoM pace since September 2022,” she says. “The core services portion of inflation is where we think the Fed wants to have ‘greater confidence’ in its trajectory before instituting a rate cut. In our view, any remaining price re-acceleration risks lie in the services portion of inflation.”
If December’s CPI report threw a bucket of water on hopes of a March rate cut by the Federal Reserve, January’s data brought out the hose.
“If Powell and other Fed members hadn’t already thrown cold water on the prospects for a March rate cut a few weeks ago, today’s CPI report might have done that for him,” says Jason Pride, Chief of Investment Strategy & Research, Glenmede. “Evidence of still-sticky services inflation is likely to give the Fed pause before cutting rates too quickly, especially as it tries to avoid paring back on tight policy too quickly and risk another wave of inflation.”
More Pros’ Takes on January CPI
Here’s what several experts have to say about January’s CPI numbers and what they mean for consumers, the Federal Reserve’s future actions, and more:
“CPI data came in stronger than the either Fed or the market wanted or expected. While the trend of core goods deflation remains solidly intact, services inflation both including and excluding shelter came in stronger than expected. The headline inflation number was also boosted by a notable uptick in food inflation back to 0.4%; we have not seen a food inflation print this high since the beginning of last year.
“While the door for a March cut had already been effectively shut given the recent Fed commentary and the jobs reports, the Fed has now locked the door and lost the key. We do not think a May cut is out of the question, but it makes sense that the odds of a May cut being priced into the market have been substantially reduced. With this new data, a first cut in June seems like the most reasonable expectation unless we see a very quick, severe drop in labor market activity or a geopolitical shock.”
—Greg Wilensky, Head of US Fixed Income, Janus Henderson Investors
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“We’ve made two steps forward in the fight against inflation, and now we take one step back. These numbers thwart some of the optimism about a May rate cut, but there’s also a lot of noise from categories like auto insurance and rents. It gives investors reason to pause following the recent strong rally in stocks, but the damage could be limited given the potential for revisions.”
—David Russell, Global Head of Market Strategy, TradeStation
“[Shelter] was a key point of disappointment for markets as the next phase of disinflation is likely to be driven by core services. While goods price pressures have generally normalized post-pandemic, housing and other service categories are a key focus for markets. The Federal Reserve is likely wanting to see evidence that disinflation has expanded beyond goods as this will help reflect that the inflation trajectory is on a more sustainable path.
“Currently, June is the most likely FOMC meeting for the first interest-rate cut.”
—Michelle Cluver, Senior Portfolio Strategist, Global X
“One theme is clear—the transition from 8% to 3% inflation was easier, and the path back to 2% inflation may not be as straight forward especially with a labor market that remains extremely tight.
“Taking into account this inflation print and recent forward guidance from the Fed, we think it’s unlikely the Fed will begin to cut rates in March. The Fed’s careful tone in January’s FOMC meeting confirmed our belief that the Fed will not decrease interest rates at their March meeting. Jerome Powell frequently noted that the committee wants to see more data to confirm that inflation is on a path to sustained 2% year-over-year price growth. As this inflation print shows, further improvements in inflation will be tougher so long as U.S. economic growth remains resilient and labor markets remain tight. We believe three to four interest rate cuts are plausible for 2024, but we don’t expect the first cut to arrive until at least May or June. Any more cuts would be because of a meaningful deceleration in the U.S. economy, which is not our base case.”
—Gargi Chaudhuri, Head of iShares Investment Strategy, Americas
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Today’s hotter print was the final nail in the coffin for the prospect of a March rate cut and will likely lead to renewed debate around a “no landing” or overheating scenario. The disinflation process is not a straight line, however, and one hot print on its own after an extended string of more favorable releases does not represent a new trend. Fed fund futures are now pricing less than a 50% chance of a May rate cut, with the first cut fully priced in June and 3.8 cuts total in 2024. While the market is moving toward the Fed dots, we believe that a May rate cut is still a possibility given the incrementally better read-through to core PCE as opposed to the less favorable headline CPI figures.”
—Josh Jamner, Investment Strategy Analyst, ClearBridge Investments
“An ongoing trend beneath the surface appeared to intensify in January—core goods prices saw outright deflation, while costs for services remained sticky. The decline in core goods was largely driven by used cars/trucks and apparel, but service price gains appeared broad-based, spanning shelter, transportation, and medical care. There were fears that accelerating wage growth out of the January jobs report could flow through to sticky services inflation, and those concerns may have been warranted.
“Rate cuts are likely still on the table for this year, but they may begin later in 2024 than the market may be anticipating. Three rate cuts, starting around summer, is the base case for now until we get compelling evidence of disinflation.”
—Jason Pride, Chief of Investment Strategy & Research, Glenmede
“CPI was hotter than expected, but this is not entirely unusual for January given seasonal adjustments, and something we saw the past two Januarys. … We’re continuing to see disinflation in commodity prices outside food and energy as well, which is positive.
“That said, this probably puts a final nail in the coffin for a March rate cut, and even makes May less likely.”
—Sonu Varghese, Global Macro Strategist, Carson Group
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