US consumer prices inflation eased in January more than anticipated, providing some relief to the markets. However, signs of strong underlying pressures on price, as well as a positive jobs report, have reinforced the belief that rates will likely remain unchanged.
The Labor Department reported that consumer prices increased 2.4% over the 12-month period ending in January. This was lower than the 2.5% economists expected and also down from 2.7% the previous month.
Prices rose 0.2% on a monthly base, which was also lower than the forecast of 0.3%.
Investors closely monitored the report to assess the path likely for Federal Reserve interest rate reductions, following a series of data that pointed towards resilient economic growth.
Heather Long, Chief economist of Navy Federal Credit Union said: “This is good news for inflation.”
The inflation rate has dropped to its lowest since May. Prices for key commodities such as rent, food and gas are also cooling. The middle class and families with moderate incomes will benefit from this relief.
Core inflation remains stable
Core consumer prices increased by 0.3% in the past month, and 2.5% over the last year when volatile energy and food components are removed. This is consistent with what was expected.
The figures show that inflation has slowed down only slowly, but businesses have continued to increase prices at the beginning of the new year.
Analysts attribute this pattern to models of seasonal adjustment that do not capture the one-off price increases at the turn of each year.
The January increase is also linked to a pass-through of broad import tariffs implemented by Donald Trump. It’s also due to the diminishing impact of readings higher than those from the beginning of last year being dropped from the annual calculations.
Fed remains cautious as markets react
Investors are still expecting the Fed to cut interest rates this year, despite the lower headline inflation figure.
Fed’s benchmark interest rate for overnight loans is currently between 3.50% and 3.75%.
The Fed’s preferred Personal Consumption Spending measure and the Consumer Price Index remain well above its 2% goal, despite the fact that inflation is down sharply from the peak of over 9% at the end of 2022.
The latest labour market statistics have complicated the picture.
The economy showed resilience in January, with the unemployment rate dropping to just 4.3%. This gave policymakers more room for patience and a sense of the strength of the market.
Fed must balance its budget in a delicate way
As the Fed prepares to balance its budget in the last months of Jerome Powell’s tenure, the latest data is released.
The Federal Reserve is expected to receive one final Consumer Price Index report (CPI), which will help them make their mid-March decision.
The policymakers’ goal is to control inflation while not derailing the labor market. This task has been made more difficult by persistent price pressures, and changing global conditions.
The delayed effect of import duty and depreciation in the value of the US dollar against the currencies of major trading partners are cited by economists as reasons for the temporary rise of inflation later this year.
Import inflation is a risk because the trade-weighted US Dollar fell by 7.4% in 2017.
Morgan Stanley strategists said historically periods of high U.S. economic growth coupled with low inflation has triggered sharp declines in the dollar, which typically support risky assets.
The stakes are high
Even though inflation has improved, the high cost of living continues to be a burden on families.
In consumer surveys, affordability is consistently cited as a top concern. This reflects the impact of price hikes over many years.
The issue of inflation has become an important political one.
Trump’s return as president was shaped by the frustration of voters over the rising cost during the term of President Joe Biden. Affordability is also expected to be a major issue in the congressional elections later this year.
The ICD first published this post US inflation lower than expected at 2.4%, Fed on hold
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