The US consumer price index (CPI) climbed 3.1% year-on-year in January, down from 3.4% in December and above the market estimate of 2.9%. The main driver of the decline in CPI were energy and food costs, which increased at a slower pace in January compared to December.
Core CPI, which excludes food and energy and is considered a more reliable gauge of inflation trends, rose 3.9% year-on year in January, unchanged from December and above the market estimate of 3.7%.
On a monthly basis, both CPI and Core CPI inched higher. CPI climbed 0.3%, up from 0.2% in December and above the market estimate of 0.2%. Similarly, the core rate rose 0.4%, up from 0.3% which was also the market estimate. This is the highest monthly gain for core CPI since April 2023 and will likely raise concerns at the Federal Reserve.
The Federal Reserve has repeatedly warned that it’s too early to declare victory over inflation, although it shifted policy at the December meeting when it projected three rate cuts in 2024. After the December meeting, the markets priced in a first rate cut in March, but those expectations have steadily declined and fell to just 4% after today’s hot inflation report. The markets have widely priced in a rate cut in June, although there is a possibility that the Fed could lower rates in May.
Fed members have been sending out the message that it is too early to start lowering rates until inflation falls closer to the Fed’s 2% target and today’s inflation report supports that stance. This has resulted in the US Dollar jumping higher and US stock indices posting sharp losses. Although the financial markets are showing strong movement in the aftermath of the inflation report, it’s important to remember the Fed will not change policy based on one release.
The US Dollar has surged following the inflation report while US stock index futures are sharply lower.
Against the major currencies, the US dollar is sharply higher. EUR/USD dropped 0.74% and the NZD/USD currency pair tumbled 0.91% in the aftermath of the inflation report.
US stock exchanges have just opened at the time of writing and are sharply lower. The S&P 500 Index has dropped by 64.61 points (1.28%) at 4,957.28.
The Nasdaq 100 Index is down 321.42 points (1.80%) at 17,562.24.