US inflation remains stubborn, CPI up 0.3% in January

Even with consecutive months of US economic data that has consistently beat estimates, putting the resilience of the US economy on full display, Chairman Jerome Powell concluded after the Federal Reserve’s latest meeting that there isn't yet the impetus to initiate a rate cut in March. This week, the Bureau of Labor Statistics released its latest reading of the Consumer Price Index (CPI) and, with it, the prospect of a near-term rate cut took another hit.

Rising more than expected in January, CPI increased 0.3% from December, pushing it 3.1% higher than this time last year. Shelter costs, which comprise approximately one-third of the CPI by weight, rose 0.6% compared to last month while food climbed 0.4%—both being largely responsible for the hotter-than-anticipated headline inflation readings. (Compared to last year, shelter and food costs were up 6.0% and 2.6% respectively.)

The volatility of food inflation is evident, with the rate at which prices increased rising dramatically throughout 2021 and 2022, and although the annual change has fallen over recent months, food prices remain elevated. The annual change in the rate at which prices were increasing for shelter costs had a more consistent climb, with its stickiness on full display as of late. Core inflation, which includes the sticky shelter costs but excludes the volatile food and energy categories, rose 0.4% compared to last month and realized a year-over-year increase of 3.9% (its lowest increase since August of 2021).

The news today doesn’t bode well for the highly-anticipated rate cuts that consumers and markets alike have been awaiting since the Fed’s decision to begin a rate-hiking campaign almost two years ago. This is now the second straight month where CPI data has beat estimates for the wrong reasons and the 34th consecutive month with the annual change in inflation being above 3%. Further, while some had expected at the outset of this year that there could be up to seven rate cuts in 2024, those hopes have faded to a more modest four.

At the end of the day, the Fed will rely on data to make their decisions. If the data doesn’t support a rate cut—or provide them the necessary confidence to cut—it (i.e. the Fed) will be reluctant to do so. Notably, the Personal Consumption Expenditures (PCE) price index release (which is the Fed’s preferred metric for inflation due to its broader range of spending and decreased volatility) is scheduled for February 29th. Between now and then we’ll only be able to speculate as to whether the data will provide the comfort the Fed is looking for to initiate the first of what’s anticipated to eventually be several rate cuts in 2024.