US inflation unexpectedly increased to 3 per cent in January, bolstering the case for the Federal Reserve proceeding slowly with interest rate cuts and hitting stocks and government bonds.
Wednesday’s consumer price index figure surpassed the expectations of economists polled by Reuters, who predicted that inflation would hold steady at December’s 2.9 per cent.
The month-on-month rise for January was also ahead of expectations, at 0.5 per cent compared with a predicted 0.3 per cent.
The surging price of eggs contributed greatly to the increase, rising 15.2 per cent over the month and 53 per cent in a year, partly because of the impact of avian flu.
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The figures from the Bureau of Labor Statistics led investors to bet that the Fed would cut interest rates just once this year. Before the data was published, the futures market had expected the first cut to arrive by September, with a 40 per cent chance of a second reduction by the end of the year.
“I would say we’re close, but not there [yet] on inflation,” Federal Reserve chair Jay Powell told lawmakers on Wednesday. “Today’s inflation print says the same thing.”
Powell told the hearing at the House of Representatives after the data was published: “We’ve made great progress but we’re not quite there yet. So we want to keep policy restrictive for now.”
“Markets are not convinced that we will see disinflation later in the year, and today’s data certainly don’t give evidence of that,” said Eric Winograd, chief economist at AllianceBernstein. He highlighted concerns that “if inflation doesn’t keep going down, the Fed won’t cut rates at all”.
After the data was published, the two-year yield on US Treasury bonds, which tracks interest rate expectations and moves inversely to price, was up 0.08 percentage points to almost 4.38 per cent.
US stocks opened sharply lower. The S&P 500 shed as much as 1.1 per cent, but recovered some ground to be down 0.7 per cent in late-morning trading. The tech-heavy Nasdaq Composite was 0.5 per cent lower, while a gauge of the dollar against six other currencies rose 0.2 per cent.
Wednesday’s inflation data also showed that core CPI, which strips out changes to food and energy prices, rose to 3.3 per cent in January from 3.2 per cent in December.
It came after the Fed defied calls from president Donald Trump to make steep cuts to borrowing costs and instead held its main rate at 4.25 per cent to 4.5 per cent.
On Tuesday, Mr Powell told Congress the central bank would continue “doing our job and stay out of politics”.
But on Wednesday Mr Trump renewed his demands on his Truth Social platform. “Interest Rates should be lowered, something which would go hand in hand with upcoming Tariffs!!!” the US president posted. “Lets Rock and Roll, America!!!” – Copyright The Financial Times
