Core inflation in the US rose by 0.45% month-on-month in January (above the 0.3% consensus forecast), pushing the year-on-year rate up slightly from 3.2% to 3.3%. The higher-than-expected data surprised financial markets. What does it mean for the Federal Reserve’s efforts to curb inflation? Will the trend of very gradual disinflation continue?
The monthly rebound was due partly to big jumps in volatile price components (used cars, car insurance premiums), but the acceleration relative to the December 2024 number was broad-based.
The MoM change was the highest since April 2023. Core CPI (ex food and energy) had eased quickly from 6.6% in September 2022 to 4.0% in October 2023. From there, it fell to below 3.5% in May 2024. Crossing the 3% threshold to finally reach the much-awaited level of 2% now appears harder.
Chicago Fed President Goolsbee, who sits on the Federal Reserve’s policy-setting committee, characterised the numbers as ‘concerning’, but also noted that it was “just one month of data”.
Close, but not there yet
Fed Chair Jerome Powell commented on the – muted – increase during testimony before Congress this week: “Inflation has eased significantly over the past two years, but remains somewhat elevated relative to the Fed’s [2%] target”.
In the face of uncertainties over the effects of the Trump administration’s policies on the economy, Powell has made it clear inflation needs to slow significantly for the Fed to lower its key rates further.
January’s figures did not signal a move in that direction, but after the latest data, Powell noted: “We are close, but not there on inflation… [the latest report] “says the same thing”. He reiterated the Fed would focus on the broader personal consumption expenditure price data as a ‘better measure of goods and services inflation’.
Expect even less from the Fed
The higher-than-expected inflation figures weighed on already muted expectations of further policy rate cuts by the Fed this year. Hopes for more action receded at the start of the year, but markets still foresaw two rate cuts. Expectations have now been scaled back to just one additional 25bp cut.
Any nasty surprise on core PCE inflation (new data due on 28 February) could result in further adjustments to these forecasts. Those could mean no further rate cuts expected in 2025, or, even a swing to anticipation of a rate hike.
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