January CPI Report: Hotter-Than-Expected Inflation Roils Markets
3min read The latest U.S. Consumer Price Index (CPI) report for January came in above expectations, sending shockwaves through financial markets as investors reassessed the likelihood of Federal Reserve rate cuts in 2024. The hotter-than-anticipated inflation figures saw the Nasdaq plunge more than 200 points in early trading, while Treasury yields surged as traders recalibrated their expectations for monetary policy. The report now places heightened scrutiny on Federal Reserve Chair Jerome Powell, who is set to testify before the House today, as market participants await his reaction to the inflation data.
Inflation Numbers Exceed Expectations
Headline CPI rose 0.5 percent month-over-month in January, above economists' expectations of a 0.3 percent increase, and accelerated from December’s 0.4 percent gain. On a year-over-year basis, headline inflation ticked up to 3.0 percent, slightly above December’s 2.9 percent figure and also surpassing forecasts of 2.9 percent.
Core CPI, which excludes volatile food and energy prices, climbed 0.4 percent month-over-month, again hotter than the 0.3 percent estimate. The year-over-year core reading came in at 3.3 percent, up from 3.2 percent in December, defying expectations of a further decline to 3.1 percent. This marks the first time in six months that core inflation has failed to show a downward trend, raising concerns that disinflation progress is stalling.
Key Drivers Behind the Inflation Uptick
Several categories contributed to the hotter-than-expected CPI reading, with shelter, energy, and food costs leading the way.
- Shelter costs rose 0.4 percent month-over-month, accounting for nearly 30 percent of the overall CPI increase. The owners’ equivalent rent and rent of primary residence indices both climbed 0.3 percent. Though shelter inflation has been moderating, it remains a persistent issue for overall price stability.
- Energy prices increased 1.1 percent month-over-month, driven by a 1.8 percent gain in gasoline prices and a similar 1.8 percent increase in natural gas costs.
- Food prices climbed 0.4 percent month-over-month, with a particularly sharp 15.2 percent spike in egg prices, the highest jump since June 2015, largely due to avian flu-driven supply constraints.
The used car and truck index also surged 2.2 percent month-over-month, extending a four-month streak of price gains in the sector. Meanwhile, motor vehicle insurance soared 2.0 percent month-over-month, reflecting higher repair and replacement costs, as well as increased claims frequency.
On a year-over-year basis, shelter costs remain stubbornly elevated at 4.4 percent, though this represents the slowest annual increase in nearly two years. Motor vehicle insurance costs surged 11.8 percent year-over-year, further fueling inflation pressures.
Supercore Inflation: A Major Concern
One of the more troubling aspects of the report was the supercore CPI reading, which measures core services excluding shelter. This metric jumped 0.76 percent month-over-month, marking the largest increase in a year. Supercore CPI is closely monitored by the Fed as a key indicator of underlying inflation pressures.
Motor vehicle insurance was a primary driver behind the supercore surge, and while seasonal factors may have played a role, the persistence of these elevated costs will be a key area of focus for policymakers.
Market Reaction: Stocks Tumble, Yields Spike
The hotter-than-expected inflation report sent shockwaves through financial markets, with equities sliding and bond yields surging.
- The Nasdaq fell over 200 points, while the S&P 500 and Dow Jones Industrial Average also posted sharp losses.
- Treasury yields spiked, with the 10-year yield jumping above 4.6 percent, as traders reassessed the likelihood of rate cuts in 2024.
- Fed funds futures saw a sharp repricing, with markets now pushing back expectations of the first Fed rate cut to October or later, compared to earlier bets for a March or May move.
This shift in rate expectations underscores investors’ concerns that the Fed may need to keep policy restrictive for longer to fully tame inflation.
Powell’s Testimony: All Eyes on the Fed
With Powell set to testify before Congress today, the CPI report will undoubtedly dominate the discussion. On Tuesday, Powell reiterated that the Fed is in no rush to cut rates, and today’s inflation data further supports a more patient stance from the central bank.
Investors will be closely watching Powell’s remarks for any signals on whether this CPI report has meaningfully altered the Fed’s outlook. If he strikes a more hawkish tone, it could further weigh on stocks and push bond yields higher.
Seasonal Factors and What Comes Next
Some economists have noted that seasonal adjustments in January can be noisy, potentially inflating the inflation reading. However, the magnitude of the upside surprise suggests that underlying inflation remains sticky. Economists will likely release updated models later in the day to assess the seasonality impact.
Looking ahead, markets will be closely monitoring upcoming inflation prints, including February’s PCE report, the Fed’s preferred inflation gauge. If inflation remains elevated in the coming months, expectations for rate cuts could be pushed even further into the second half of the year.
Conclusion: A Reality Check for the Market
The January CPI report served as a stark reminder that inflation remains a challenge, and the road to the Fed’s 2 percent target may be bumpier than previously thought. With markets now adjusting to the possibility of fewer or delayed rate cuts, volatility is likely to persist in the near term.
For now, investors will be watching Powell’s testimony for further insight into how the Fed interprets today’s data and whether the central bank still believes rate cuts are on the table in mid-2024 or if they could be pushed out even further.
