US Inflation Declines for the 7th Consecutive Month: January CPI at 6.4%

The latest US CPI print showed annual inflation cooling to 6.4% in January, marking the seventh straight month of declines from 40-year high inflation last year. The latest inflation data will be crucial in determining Fed’s next moves. However, many expect the central bank will continue raising rates amid a hot labor market and rising wages. 

Core CPI Drops to 5.6% in January

The US annual inflation rate fell for a seventh consecutive month in January, dropping to 6.4% from 6.5% in December, the Labor Bureau reported on Tuesday. The report is higher than economists’ expectations of 6.2%. 

The core consumer price index (CPI), which ignores energy and food costs, stood at 5.6%, compared to the estimated 5.5% and down from 5.7% in December. On a monthly basis, the CPI and core CPI increased by 0.5% and 0.4%, respectively, in line with consensus projections of 0.5% and 0.4%. 

The Bureau of Labor Statistics (BLS) used a different method to calculate the new CPI, considering only one year of expenditure data instead of 2 years. 

US equity futures and European stocks rose on Monday as investors braced for the CPI release, which will play a pivotal role in assessing the Federal Reserve’s monetary policy going forward and the pace of interest rate hikes. The tech-weighted Nasdaq Composite led the gains, rising 1.5%, trailed by the Dow Jones Industrial Average and the S&P 500, which gained 1.1% and 1.2%, respectively. 

The yield on the 10-year Treasury note fell 2.7 basis points (bps) Monday to 3.71%, whereas the two-year yield increased by 2.3 bps 4.53%. Last year, the yield on the 10-year Treasury note slipped below its 2-year counterpart for the first time in 15 years when inflation peaked at 9.1%. 

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Strong Labor Market and Rising Wages Likely to Justify Further Hikes 

While the latest CPI report met expectations that inflation cooled down in January, it remains to be seen how the Fed will react. The US central bank has been reiterating the need to keep raising interest rates and slow the US economy in recent months. Some sources of inflation remain difficult to tame, such as the hot labor market and increasing wages.

Nonfarm payrolls rose 0.2% in December to 223,000, beating the Dow Jones estimates of 200,000. The Fed responded earlier this month when it hiked interest rates by 25 bps, its first rate increase in 2023. 

Even though it did not stop raising rates yet, the 25 bps hike gave some respite to investors after the central bank delivered several consecutive jumbo increases of 75 bps last year to bring down 4-decade high inflation. 

When do you think is the earliest we can expect the Fed to stop hiking interest rates? Let us know in the comments below.