US Fed might defer rate cuts as inflation stays elevated: analysts
FEDERAL Reserve policymakers waiting for more evidence of easing price pressures before they cut interest rates may find themselves waiting a bit longer, after a government report on Tuesday (Feb 13) showed consumer inflation stayed elevated last month.
The consumer price index (CPI) was up 3.1 per cent in January from a year earlier, down from its 3.4 per cent pace in December but more than the 2.9 per cent economists polled by Reuters had been expecting. Underlying core inflation, which strips out energy and food prices, rose 3.9 per cent from a year earlier for a second straight month.
That stickiness is not going to add to Fed confidence that inflation, which is down from its 40-year-high in mid-2022, is truly on a path to the Fed’s 2 per cent goal.
The Fed last month kept its policy rate in the 5.25 to 5.5 per cent range, where it has been since last July, and while Fed chairman Jerome Powell noted progress, he also said March would likely be too soon for the Fed to be sure it has won the fight with inflation.
US employers added more than 350,000 jobs in January, a report earlier this month showed. With the job market still strong, still-too-high inflation gives the US central bank little reason to rush on rate cuts.
After Tuesday’s inflation report, traders previously betting on a rate cut at the Fed’s Apr 30-May 1 meeting now see June as more likely.
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“If this keeps up with another month or two of inflation staying high, you can kiss a June (rate cut) goodbye and we’re probably looking at September,” said Peter Cardillo, chief market economist at Spartan Capital Securities. “It’s a hotter-than-expected report and it’s part of what the Fed has been alluding to when it says it’s too early to say that inflation has been beaten.”
A big part of the CPI’s strength in January was an acceleration in shelter costs, to 0.6 per cent from a month earlier, from a 0.4 per cent pace in December.
The Fed targets 2 per cent inflation by a different measure, the personal consumption expenditures price index, which gives less weight to the shelter component – moving some economists to predict that the CPI report would not bust Fed confidence in inflation’s decline after all.
Goods prices fell, the report showed, with clothing down 0.7 per cent and used cars down 3.4 per cent.
But the report also showed services inflation continuing to rise, with medical services up 0.7 per cent and airfares up 1.4 per cent.
“This was a broad-based increase in core services that justifies the Fed’s ‘wait-and-see’ decision,” said Inflation Insights’ Omair Sharif. “We had some good disinflation data over the second half of 2023, but it was never going to be a straight line down, and some bumps along the road were to be expected.” REUTERS
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