Inflation Heats Up in January

A larger-than-expected rise in the consumer price index for the month may limit future rate cuts by the Fed

by BW, Standard & Poor's, and Action Economics staff

Inflation is showing renewed signs of life, much to the chagrin of financial markets and the Federal Reserve. A report released Feb. 20 showed that the U.S. consumer price index (CPI) rose 0.4% in January, while the core rate, excluding food and fuel, rose 0.3%. Markets expected tamer readings of 0.3% and 0.2%, respectively.

The headline CPI figure posted a 4.3% rate of growth over last year, up from 4.1% seen the month before. The core rate rose to a 2.5% year-over-year pace, from 2.4% seen previously.

While a number of Fed members continue to downplay inflation, noting an expected moderation in price growth due to the slowdown in the economy, the stronger-than-expected data will call this into question, says S&P Economics.

Core Inflation Trend Is Up

The year-over-year rise in headline CPI leaves this inflation measure at elevated rates, alongside the uptick in the corresponding core inflation rate, notes Action Economics. The economic research outfit expects the year-over-year headline rate to tick down to 4.2% in February, but says the core figures are poised to trend upward.

Price gains were reported in a number of categories in January. Energy prices were up 0.7% in January, and up 19.6% over last year. Food prices were up 0.7%, and apparel costs rose 0.4%.

The CPI gains for January follow reports in the prior week of enormous headline and core increases for the import and export trade price measures on the month, which should put substantial upward price pressure into the pipeline, according to Action Economics.

Treasury prices declined in early trading Feb. 20 on the hotter-than-expected CPI data, which came alongside a rebound in housing starts. Longer-dated Treasuries underperformed amid rising concerns about inflation. The 10-year note yield jumped more than three basis points, to 3.935%. Equities, which were already set for a negative start to the session, moved lower after the report.

Though the Federal Open Market Committee is likely to show more concerns over the slowdown in growth, vs. the upward trajectory of inflation, in its Jan. 29-30 minutes (to be released later in the day on Feb. 20), these data can't be good news to policymakers. Action Economics figures the renewed inflation pressure may limit any easing by the Fed at its Mar. 18 policy meeting to a 25-basis-point cut, vs. the market's expectation for 50 basis points.