CIO Notebook: Fed Still Seeking Confirmation Following Hot January CPI Print

February 13, 2024

January’s data seemingly supports the Fed’s current stance of seeking greater confidence that inflation is firmly on the path to 2%.

January U.S. inflation data, released today, came in hotter than expected for the third month in a row. Headline CPI was up +0.3% month-over-month and up +3.1% year-over-year, versus expectations of +0.2% and +2.9%, respectively. Core CPI was up +0.4% on a month-over-month basis and up +3.9% on a year-over-year basis compared with a consensus expectation of +0.3% and +3.7%, respectively.

In our view, the persistence in core inflation is perhaps the most troubling aspect of today’s print. Shelter remains a primary driver, as shelter costs rose by +0.6% month-over-month, and +6.0% year-over-year, compounding increases of +6.2% and +6.5% in the prior two months. In addition, costs for auto insurance and health insurance were both up +1.4% month-over-month and medical care services were up +0.5% month-over-month. (These increases helped to drive an increase in the core services ex. housing metric, which rose by +0.85% in January.) Solace, and an offset to these hotter prints, was found in used cars and apparel, which both exhibited declines; in fact, goods remain squarely in deflationary territory.

The higher print in headline CPI was driven in part by an increase in food prices, as four of the six major grocery food group indexes increased over the month. Breaking it down, food at home was up +0.4% month-over-month, and food away from home was up +0.5% month-over-month. Renewed pressure on higher food prices, if it persists, would likely be reflected in retail sales and consumer confidence readings. With lower-income households already feeling the sting of previous price increases and elevated borrowing costs, the divergence between higher-income and lower-income households’ spending could widen—a dynamic that will not escape the Federal Reserve’s (Fed)’s attention.

Equity markets have been pressured lower following today’s release, with the Nasdaq dropping by almost -1.8% following the open; both 2 Year and 10 Year Treasury yields moved higher in response. In terms of Fed expectations, the CME FedWatch Tool now reflects that the probability of a rate cut in March has moved from 16% yesterday to 6.5% today. (To put this in context, the probability was almost 77% only a month ago.) Pushing out to May, the probability of a rate cut now sits at only 36%.

We believe that January’s data seemingly supports the Fed’s current stance of seeking greater confidence that inflation is firmly on the path to 2%. While both the bond and equity markets reacted negatively to the reading coming in above consensus, the threat of a meaningful re-acceleration in inflation appears at this point to be low. The U.S. economy has been stronger than anticipated, but structural sources of inflationary pressure, such as shipping costs, energy prices and wages, are either moving consistently lower or are already anchored near the desired level. In our view, this continues to support the notion of rate cuts in 2024, albeit fewer than what had been priced in coming into the year.


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