January CPI accelerates, but trend easing

A man arranges produce at Best World Supermarket in the Mount Pleasant neighborhood of Washington, D.C., U.S., August 19, 2022. REUTERS/Sarah Silbiger

NEW YORK, Feb 14 (Reuters) – U.S. consumer prices increased from the prior month in January but met expectations, while the underlying trend showed inflation is slowing, likely keeping the Federal Reserve on a modest path of interest rate hikes.

The consumer price index (CPI) rose 0.5% last month, the Labor Department said on Tuesday. Data for December was revised higher to show the CPI gaining 0.1% instead of the 0.1% fall as previously reported. In the 12 months through January, the CPI increased 6.4% after advancing 6.5% in December. Economists polled by Reuters had forecast the CPI climbing 0.5% for January and rising 6.2% year-on-year.

MARKET REACTION:

STOCKS: S&P 500 futures were choppy and last down 0.1%

BONDS: The yield on 10-year Treasury notes was down 1.6 basis points to 3.704%; The two-year U.S. Treasury yield was up 0.3 basis points at 4.537%.

FOREX: The dollar index fell 0.20%, with the euro up 0.35% to $1.0757.

COMMENTS:

ATHANASIOS VAMVAKIDIS, GLOBAL HEAD OF G10 FX STRATEGY, BANK OF AMERICA, LONDON

“Month-over-month as expected, but upward revisions for last month brought year-over-year numbers above expectations. This should keep the USD strong. Inflation in the US is clearly sticky. This will keep the Fed policies on track, keeping the USD strong — not necessarily stronger. The big picture is that the inflation data clearly show that the market is too optimistic about inflation dropping enough this year to allow the Fed to start cutting rates. This suggests the USD may not weaken by as much as market expect, if at all.”

JANE FOLEY, HEAD OF FX STRATEGY, RABOBANK LONDON, LONDON

“The US CPI inflation print triggered an initial bout of volatility for the USD with the as expected m/m data being confounded by a stronger than expected y/y number. However, the DXY index is now little changed from its pre-data levels.

“On balance the market hasn’t been able to take any strong direction from the CPI inflation report. Energy, gasoline, service costs and housing were all higher. That said, the headline number has decelerated for seven straight months. It remains the case that CPI inflation is too high and is likely the hawkish messages of the FOMC. That said, the market has already re-priced in favor of more tightening from the Fed since the release of Jan payrolls.”

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JAMES BINNY, GLOBAL HEAD OF CURRENCY, STATE STREET GLOBAL ADVISORS, LONDON

“The much longed for, and in several places expected, peak in inflation has been postponed again. It’s not a frightening number in itself but it does not provide the evidence of a peak in inflation – and so peak in interest rates – which investors want to see.”

MATTHEW MISKIN, CO-CHIEF INVESTMENT STRATEGIST, JOHN HANCOCK INVESTMENT MANAGEMENT, BOSTON

“The shelter component continues to be such a huge driver of inflation … If that eventually does come down, that is going to be good news for inflation over the course of the year.

“I think (this report) justifies the rise in the two-year yields over the last several weeks and a bit of the resetting in the bond market. But from here, we need to see if that shelter component eventually starts to slow down. The housing market works with a lag and if that does come down, then the Fed by the end of the year will be closer to getting on to that target of 2%.

“I think the bond market is right on the short end that two hikes in the next couple of months are warranted. If that housing data can start to show the weakness, then the Fed will be okay to pause by the middle of the year.”

TOM PORCELLI, CHIEF U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW YORK

“This number was better than feared. I think going into this number there were expectations that maybe this was going to be yet another indicator that would potentially force the Fed to keep at this hiking cycle, keep going for a while longer. That did not materialize today. This is a completely consensus outcome. Even looking at some of the guts of the data, one of the things that really stands out is that shelter, and specifically owners’ equivalent rent – it’s pretty clear that we’re now past the worst. We’re seemingly in a bit of a basing pattern here where the next leg here is probably lower, given what we know in real time about rent prices. So, I think that comes as a big source of relief on some level and in the context of shelter has been doing a lot of the damage from an inflation perspective, particularly over recent months. So, I think in a lot of ways it’s still very easy to make the case that it looks like inflation will continue to soften as the year progresses and I’m sure this comes as an enormous source of relief at the Fed.

“I think the pieces are in place for inflation to continue to slow down. We’re seeing a lot of disinflationary force coming in the goods sector, that’s been true now for months. That did all of the damage on the way up, particularly over the last couple of years, and it’s really going to ease price pressures on the way down.”

TOM DI GALOMA, CO-HEAD GLOBAL RATES TRADING, BTIG, NEW YORK

“The number was a lot stronger on a year-over-year basis. You got a number that changes the disinflation narrative that people have been talking about. This number obviously has put a little bit of caution in my thinking.

“For the most, we’re seeing a stronger set of numbers, and we’ll have to see what some of the Fed speakers have to say today.

“My quick take on this is that the number in my view is higher than what the market expected. Disinflation is kind of changed here. This gives some ammunition to the Fed to basically come out with more hawkish rhetoric. The Fed’s got 25 to do in March, maybe another 25 in May. The chances of 25 in June is perhaps 40%.”

ROBERT PAVLIK, SENIOR PORTFOLIO MANAGER, DAKOTA WEALTH, FAIRFIELD

“The numbers are continuing to show a modest, sequential decline, which is really what the trend has been (and) is somewhat positive.

“It’s not going to necessarily influence the Federal Reserve one way or another. I think what you’re going to continue to see and hear is the market to be unsure about what the Fed does next. The data doesn’t really change the expectations of a 25 basis point hike at the next meeting, followed by either a pause or another 25 bps rate hike, possibly at the meeting after that.

“I do expect a pause to be coming somewhat soon. I don’t think it indicates any kind of pivot or change in the direction of the Federal Reserve at least, not unless the economy starts to weaken substantially and I don’t see that happening.”

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

“The topline and core were higher than consensus but year-over-year both core and topline are still headed lower – just less than expected. It still indicates that overall inflation is moving down.

“I don’t think (this report) moves the needle for the Fed, and I suspect they’re taking a hard look at the data. Does it mean we are headed for at least two more rate hikes? Absolutely. My guess is the year-over-year decline in topline and core (CPI) suggests another 25 basis point hike in March and another one in May.

“It’s as expected in terms of the market’s positive reaction.

“(Negative real earnings) will begin to show up in consumer behavior, this week’s retail numbers are probably going to show a decline of 0.6%. And with inflation still elevated, the consumer is bound to change their habits. It’s just a matter of time.”

ART HOGAN, CHIEF MARKET STRATEGIST, B. RILEY, NEW YORK

“I would argue that this very anticipated inflation report came in very much in line with expectations. So what we care about is the month over month change and this is also what we’re looking for, movement in the right direction of the year over year number.

“While we’d love to see this come down faster, it’s very much in line with expectations.

“Consensus is now in line with the Fed. So markets now believe, much like the Fed does, that the terminal rate will be reached in the month of May and it’ll be a range of 5%-5.25%.

“So I don’t think any of this necessarily in and of itself changes expectations. I think the aggregate of the stronger jobs number, a CPI very much in line with the consensus and a retail sales report for January, that looks to be.”

JOE SALUZZI, CO-MANAGER OF TRADING, THEMIS TRADING, NEW JERSEY

“People were anticipating a worse than expected number. It seems like everybody was getting set up this morning that this would be a so-called hot a number and then the numbers itself were pretty much in line.

“The dollar and the bonds are a little bit more accurate, in my opinion, as stocks can have a kneejerk reaction. The market is anticipating based on this data one more 25 bps hike and then we’ll see from there and that’s bullish scenario at this point.”

HUGH JOHNSON, CHIEF ECONOMIST, HUGH JOHNSON ECONOMICS, ALBANY, NEW YORK.

“You have a little bit of a negative reaction because these numbers are not going to take the pressure off the Federal Reserve.

“The real issue is what is the Federal Reserve going to do, it’s pretty widely expected that they’re going to raise rates both at their March meeting as well as their May meeting.

“I think the more important question though is what will the Federal Reserve do with regard to the terminal rate when they meet in March, and right now the expectation is starting to grow that they’re going to increase the terminal rate from 5 to 5 1/2.

“So, if you’re looking for some indication that the Federal Reserve is going to pause, take its foot off the brake, you’re not going to see it in these numbers.

“There’s not much there for the Federal Reserve to give them some sort of a justification for taking their foot off the brake and reducing interest rates.”

ADAM SARHAN, CHIEF EXECUTIVE OFFICER, 50 PARK INVESTMENTS, NEW YORK

“The reaction has been positive. If you look at the dollar, it is down, the euro up, and that’s basically means the narrative remains unchanged that the Fed will eventually slow down; It is: raising rates, stop raising rates and then possibly cut rates down the road in the future and avoid a hard landing, completing their goal of a soft landing.

“I wouldn’t be surprised if the market fell off a little bit just because it had a big run over the last 5-6 weeks. But in the short term, the CPI so far, the market is shrugging it off.”

Compiled by the Global Finance & Markets Breaking News team

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