Inflation higher than expected, dampening hopes of Fed rate cut

U.S. consumer prices rose sharply at the start of the year, dampening hopes for a sustained decline in inflation and potentially delaying the economic recovery Fed cuts interest rates.

The so-called core consumer price index, which excludes food and energy costs, rose 0.4% from December, beating expectations and reaching its highest level in eight months, according to government data on Tuesday. It rose 3.9% from the same period last year and was the same as last month.

Economists believe the core indicator better reflects underlying inflation than the overall CPI. The indicator rose 0.3% from December and 3.1% from the same period last year.

The data further reduces the likelihood that Fed officials will begin cutting interest rates soon, and any further acceleration could reignite talk that they will resume raising rates. Some policymakers have said they want to see a further broad-based easing of price pressures before cutting interest rates.

The S&P 500 opened lower and U.S. Treasury yields rose sharply after the U.S. Bureau of Labor Statistics released data. Traders have given up bets on when the Fed will start cutting interest rates and have slashed March odds to almost zero.

“The Fed sees this as another reason to wait until May or June, but the trend direction is still lower,” said Casey Jones, chief fixed income strategist at Charles Schwab. increased by housing, it’s a wait and see when those costs will come down. “

The figures reflect rising prices for food, car insurance and health care, with housing costs accounting for more than two-thirds of the overall increase. Outpatient services and pet services both posted record increases for the month.

The updated methodology saw the largest monthly decline in used cars since 1969. Broader commodity and energy prices also continued to fall, underscoring policymakers’ concerns that recent deflation is concentrated in a few categories.

Last week, the annual revision of the U.S. Bureau of Labor Statistics (BLS) comfirmed Inflation is falling back just as quickly as initially reported in late 2023. But the new weightings, which take effect from January data, will put more emphasis on services rather than goods, which economists say will give a small boost to the outlook for this year’s CPI. Year.

Home prices, the largest category in the services sector, rose 0.6% to reach their highest level in nearly a year. Economists believe a sustained slowdown in this area is key to bringing core inflation down to the Fed’s target.

Prices for services, excluding housing and energy, rose 0.8% from December to the highest level since April 2022, according to Bloomberg calculations of the super core indicator. While policymakers stress the importance of considering this metric when assessing a country’s inflation trajectory, they calculate it against a separate index.

This indicator is called the Personal Consumption Expenditures Price Index, and it puts less emphasis on housing than the CPI. This is one of the reasons why PCE is getting closer to the Fed’s 2% target.

Friday’s producer price index will provide more clues, as several categories in the report will be factored directly into the PCE calculation. January PCE data will be released later this month.

Unlike the services sector, continued declines in commodity prices for much of the past year have brought some comfort to consumers. Prices of so-called core commodities, which exclude food and energy goods, fell the most since July.

Fed officials will get a number of inflation reports, including a consumer price index (CPI) report, ahead of their next policy meeting on March 19-20. has been pushing To get central banks to start easing interest rates, policymakers have indicated they are likely keep on hold The meeting was held for the fifth time in a row.

This is partly due to strength A separate report on Tuesday showed real earnings rose at the largest annual rate since July, continuing a month-long trend of wage growth slightly outpacing inflation.

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