U.S. consumer prices rose more than expected in January, according to the latest data from the Bureau of Labor Statistics released Tuesday morning.
The consumer price index (CPI) rose 0.3% from last month and 3.1% from a year earlier in January, slightly higher than the monthly increase of 0.2 % in December, but a deceleration from December's 3.4% annual gain.
Both measures were higher than economists' forecasts of a 0.2% monthly increase and a 2.9% annual increase, according to Bloomberg data.
On a “core” basis, which excludes the more volatile costs of food and gasoline, prices in January increased 0.4% from the previous month and 3.9% from last year.
Investors were closely watching the numbers for clues as to when the Federal Reserve would begin cutting interest rates. Markets are now pricing in a nearly 80% chance that the Fed will cut rates in June, contrary to earlier expectations that the central bank would begin cutting rates in May.
Stocks fell in early trading after the report, while the yield on the 10-year Treasury note rose about 10 basis points to trade near 4.3%.
“It’s too early to declare victory over inflation,” wrote Torsten Slok, partner and chief economist at Apollo, Yahoo Finance’s parent company. “Maybe the last kilometer was indeed more difficult.”
Notable inflation figures include the housing index, which rose 6% on an unadjusted annual basis and 0.6% month-over-month. This is a particularly high rate after the index increased by 0.4% on a monthly basis in December.
According to economists, persistent inflation in the housing sector is largely responsible for the higher underlying inflation figures.
The rent and owner equivalent rent index increased by 0.4% and 0.6% respectively on a monthly basis. Landlord equivalent rent is the hypothetical rent a landlord would pay for the same property.
Other indexes that rose in January included auto insurance and medical care. The used car and truck index as well as the clothing index were among those that declined during the month, the BLS noted.
Used car prices, which have been falling steadily since October, fell 3.4% from December to January and 3.5% on an annual basis.
The food index increased by 2.6% in January compared to last year, with food prices increasing by 0.4% from December to January. The home food index rose 0.4% over the month after rising just 0.2% in December.
Food consumed away from home increased 0.5% month-on-month after increasing 0.3% in December.
Energy prices, meanwhile, continued to fall, falling 4.6% annually and 0.9% month-over-month.
Fuel oil led the decline, with prices falling 4.5% from December to January. Gas prices fell 3.3% month over month after falling just 0.6% in December.
To hike or not to hike?
Annual inflation remained above the Federal Reserve's 2% target. But the Fed's preferred inflation gauge, the core PCE price index, has fallen below that rate on a six-month annualized basis, bolstering hopes that the central bank may begin cutting rates of interest.
Tuesday's report, however, will more than temper those expectations.
“This is a bad report for those betting that the Fed will soon start lowering interest rates,” wrote Eugenio Aleman, chief economist at Raymond James, in reaction to the hotter-than-expected report.
Read more: What the Fed's rate decision means for bank accounts, CDs, loans and credit cards
Ellen Zentner, chief U.S. economist at Morgan Stanley, added: “The acceleration in core PCE is consistent with our view of a rocky road ahead. We believe the sequential numbers in the first quarter of 2024 will be higher overall than what we saw in the first quarter of 2024.”
Citi, meanwhile, warned that high inflation figures would likely impact the recent stock market rally.
“A strong core CPI will not be a game-changer but will likely lead to a near-term pullback,” wrote Stuart Kaiser, head of U.S. equity trading strategy at Citi. “With strong growth data as a backdrop, it will be difficult for the Fed to cut interest rates as soon as some investors had hoped and make the market fear an overheating type scenario despite very restrictive policy. “
“We should see a pullback here, perhaps in the order of 2 to 4 percent, but that is somewhat limited by the fact that the economy is still quite strong,” he continued.
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