Surprise Spike In US Inflation Stuns Fed, Halts Rate-Cutting Plans

(CTN News) – A surge in US consumer prices in the early months of this year has quelled expectations that inflation will continue to drop and likely postponed any interest rate cuts from the Federal Reserve in the near future.

In January, the core consumer price index (CPI), which is excluding food and energy costs, increased unexpectedly by 0.4% over December, marking the first significant rise in eight months for the index.

The annual increase was 3.9%, the same as last month, and remains in line with the prior month’s increase. There is an opinion among economists that the core inflation gauge is a better indicator of underlying inflation than the overall consumer price index, which increased by 0.3% from December and 3.1% from one year ago.

As a result of this development, it becomes more difficult for the Fed to make immediate cuts in interest rates, potentially reviving the conversation about reducing interest rates once again.

There are some policymakers who advocate the need for a more comprehensive easing of price pressures before considering a reduction in interest rates.

Following the release from the Bureau of Labor Statistics, the S&P 500 opened lower, and Treasury yields surged, which led traders to adjust their expectations, with the odds of a rate cut in March quickly dropping to almost zero.

A significant portion of the total increase was attributed to increases in the prices of food, automobile insurance, and medical care, with shelter costs accounting for more than two-thirds of the overall increase.

CPI expectations for the year ahead have been slightly improved by the recent annual revisions, which confirmed that inflation will be in a recession at the end of 2023, and new weightings from January’s figures will slightly boost the outlook.

It is important for policymakers to stress that a sustained moderation in housing prices is crucial in order to bring core inflation down to the Fed’s target.

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