(Reuters) -The U.S. consumer price index increased more than expected in January, reinforcing the Federal Reserve’s message that it was in no rush to resume cutting interest rates amid growing uncertainty over the economy.
The CPI jumped 0.5% last month after gaining 0.4% in December, the Labor said on Wednesday. In the 12 months through January, it increased 3.0% after advancing 2.9% in December.
Economists polled by Reuters had forecast the CPI gaining 0.3% and rising 2.9% year-on-year.
Fed funds futures showed traders do not expect another Fed ease until at least September, having shown before the report expectations for a 25 basis point cut in June.
MARKET REACTION:
STOCKS: U.S. stock index futures turned 0.99% lower, pointing to a weak open on Wall Street
BONDS: The 10-year U.S. Treasury yield rose to 4.641%, while the two-year yield jumped to 4.359%FOREX: The dollar index extended to 0.37% higher, and the euro fell 0.18%
COMMENTS:
DAN SILUK, HEAD OF GLOBAL SHORT DURATION AND LIQUIDITY, PORTFOLIO MANAGER, JANUS HENDERSON (by email)
“The bottom line is clear. The Fed should not be cutting. No matter which way the Fed chooses to slice-and-dice the data – Headline, Core, Supercore – all came in higher than expectations. Both 3-month and 6-month annualised reads are also moving higher. While early year CPI reads are notorious for seasonality and distortions, the labor market is clearly stable and economic conditions don’t warrant easier conditions. All signs suggest that the neutral interest rate should be higher.”
BEN VASKE, SENIOR INVESTMENT STRATEGIST, ORION, OMAHA, NEBRASKA
“Inflation has boiled back to the top of headlines as market and sentiment-based inflation expectations have been on the rise. This morning’s report gave those expectations merit, with the MoM CPI reading ticking up once again, this month by 0.5%, and YoY CPI growth back to a 3-handle. The path forward for Powell and the Fed is getting murkier as investors are likely to continue questioning the rapid initial pace of rate cuts in Q4 and the economy grapples with tariff implications going forward.”
GENE GOLDMAN, CHIEF INVESTMENT OFFICER AT CETERA INVESTMENT MANAGEMENT, EL SEGUNDO, CA
“Today’s number came in much hotter than expected. This further affirms that the Fed won’t be cutting rates any time soon.”
“This news is consistent with what Powell and all the other Fed speakers said yesterday, that we need to see lower inflation in order to cut rates.”
“PPI comes out tomorrow and PPI is much more important than CPI because PPI should reflect should reflect producers going in and purchasing items in advance of the tariffs.”
“Bond yield are higher. Futures are down and the dollar is higher. All this things suggest the Fed isn’t likely to cut rates any time soon.”
ADAM BUTTON, CHIEF CURRENCY ANALYST, FOREXLIVE, TORONTO
“It’s very straightforward. The dollar is hot, responding to a higher CPI report, we’ve priced out about 10 basis points for this year. We’re down to one cut priced in for all of the year. A lot of people were flagging the potential for a hot January reading, including us. This is the fourth year in a row with a surprisingly hot January reading. There are many types of price increases that occur at year end in sticky and non-services inflation categories that economists have been struggling to forecast. I guess probably the takeaway is no matter what the reason was for the upside surprise, the Fed has been very clear that it won’t cut rates until inflation is close to 2%. So, whether it’s one-offs due to eggs or the fire in California, the prospect of hitting 2% inflation this year when we start the year with 0.5%, is greatly diminished.”
CHARLIE WISE, SENIOR VICE PRESIDENT, RESEARCH AND CONSULTING, TRANSUNION IN CHICAGO (email)
“Today’s CPI report shows that while well down from its recent peak in 2022, the inflation rate remains elevated above the stated goal of 2% year-over-year. This lends credence to the decision of the FOMC to pause further interest rate cuts at their January meeting. If similar elevated CPI readings present in future months, the Fed may continue their pause at the next meeting and potentially later, particularly if the employment situation remains solid. This could continue the cascading effect of stubbornly elevated interest rates impacting a range of credit products, directly or indirectly, including credit cards, mortgages, unsecured personal loans, and auto loans. “
BEN MCMILLAN, PRINCIPAL AND CHIEF INVESTMENT OFFICER, IDX INSIGHHTS, TAMPA, FLORIDA
“To see CPI come in like this, especially given how strong energy has been in the recent months, isn’t terribly surprising. Equities in the markets are selling off pretty hard last night. I think Powell’s comments yesterday were basically: ‘we’re content to stay put as the economy is doing well and we’re kind of close to the neutral rate’. I think he’s going to reiterate the message that ‘don’t get your hopes up for more than one or if any rate cuts this year.’ The market was discounting two rate cuts this year. I wouldn’t be surprised if that starts to go closer to zero.”
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK
“Today’s data confirms that inflation is still a problem, and obviously it upholds the Fed’s stand on being cautious in lowering interest rates.”
“Coupled with the prospects of the tariffs, it adds to inflation worries.”
“It’s negative all the way around, and it certainly means that the yields are likely to move higher. Metals are under pressure because of the stronger dollar and the rising yields and stocks are basically falling out of bed.”
“If it keeps up like this another month or two of these kinds of numbers, that probably means that the Fed is likely to stay on hold for the remainder of the year.”
“(Federal Reserve Chair Jerome) Powell made it clear that they’re going to stick to their dual mandate, and that they’re not going to be bullied by any politician.”
“Trump has his hands tied. Will he pressure the Fed? Yes. Will the will the Fed blink? No.”
WHITNEY WATSON, GLOBAL CO-HEAD AND CO-CHIEF INVESTMENT OFFICER OF FIXED INCOME AND LIQUIDITY SOLUTIONS, GOLDMAN SACHS ASSET MANAGEMENT (by email)
“Today’s stronger than expected CPI release is likely to further cement the FOMC’s cautious approach to easing. A resilient labor market also provides scope for patience. We think the Fed is likely to remain in ‘wait and see mode’ for the time being and anticipate the Fed staying on hold at next month’s meeting.”
(Compiled by the Global Finance & Markets Breaking News team)
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