January Inflation Complicates Fed Policy
A hotter-than-expected inflation reading for January makes it much more likely that the Federal Reserve will keep rates on hold for the foreseeable future. The latest data from the Bureau of Labor Statistics showed that the Consumer Price Index (CPI) increased 3% over the prior year in January, an uptick from December's 2.9% annual gain in prices. The index rose 0.5% over the previous month, the largest monthly increase since August 2023 and an acceleration from the 0.4% rise seen in December. Economists had expected a 0.3% increase. Seasonal factors like higher fuel costs and continued stickiness in food inflation kept the headline figures elevated. Notably, the index for eggs increased 15.2%, the largest increase since June 2015. It accounted for about two-thirds of the total monthly food-at-home increase. Year over year, egg prices have surged 53%. On a "core" basis, which strips out the more volatile costs of food and gas, prices in January climbed 0.4% over the prior month, higher than December's 0.2% monthly gain and the largest monthly rise since April 2023. Core prices rose 3.3% over last year, marking an uptick from the 3.2% seen in December, which was the first time since July that year-over-year core CPI showed a deceleration in price growth. Core inflation has remained stubbornly elevated due to sticky costs for shelter and services like insurance and medical care. Shelter did show some signs of easing last month, rising 4.4% on an annual basis, the smallest 12-month increase in three years. Similarly, the year-over-year increase in rent was the coolest since February 2022. "I would say we're close but not there on inflation," Powell said in an appearance before House lawmakers. So "we want to keep policy restrictive for now." Traders reduced their prediction of 2025 rate cuts down to just one — and not until much later in the year. Fed officials were already predicting a cautious stance in 2025. In December they predicted two cuts for all of 2025, downgrading a previous estimate of four, due to the uncertain path of inflation and concerns about the effect of economic policies from the new Trump administration. Powell reinforced that view. "We do not need to be in a hurry to adjust our policy stance."
