US inflation tops forecasts, bolstering case for Fed to hold

US INFLATION picked up broadly at the start of the year, further undercutting chances of multiple Federal Reserve interest-rate cuts this year at the same time the Trump administration presses forward with tariffs.

The monthly consumer price index (CPI) rose in January by the most since August 2023, led by a range of household expenses such as groceries and gas, as well as housing costs. Excluding often-volatile food and energy costs, the so-called core CPI climbed 0.4 per cent, more than forecast, fuelled by car insurance, airfares and a record monthly increase in the cost of prescription drugs.

Inflation tends to come in higher in January, because many companies choose the start of the year to hike prices and fees. That pattern has been been exacerbated in the post-pandemic era, and several forecasters suggested that the jump in price growth last month will not be repeated going forward.

Still, Wednesday’s (Feb 12) report from the Bureau of Labor Statistics serves as further evidence that inflation progress has at least stalled – if not in danger of being reversed. Combined with a solid labour market, it will likely keep the Fed on hold for the foreseeable future. Policymakers are also awaiting further clarity on Trump’s policies, particularly tariffs, which are already causing consumer inflation expectations to rise.

The S&P 500 fell while Treasury yields and the US dollar spiked. Interest rate swaps showed traders are only expecting one quarter-point Fed rate cut this year. Before the CPI report, traders were leaning towards two cuts.

“We saw strength across the board – whether you are looking at energy, food, within core components – and so I think it points to a price environment that still remains difficult as far as the Fed is concerned,” said Sarah House, a senior economist at Wells Fargo. “So for how long you expected the Fed to be on hold going into this report, I think this only lengthens that time frame.”

Fed chair Jerome Powell, speaking before the House on Wednesday, said the latest consumer price data show that while the central bank has made substantial progress towards taming inflation, there is still more work to do.

“I would say we are close, but not there on inflation,” Powell told the House Financial Services Committee in response to a question on the second day of his semi-annual testimony to Congress.

Earlier Wednesday, Trump again called for lower interest rates and later suggested the inflation numbers were due to his predecessor, President Joe Biden.

SEE ALSO

US core inflation seen rising at firm pace in January

Record high imports sharply widen US trade deficit in December

The January increase in the CPI was led by grocery prices, with two-thirds of that advance due to higher egg prices in the wake of a deadly bird flu outbreak. The more-than 15 per cent jump was the largest since June 2015. Costs of hotel stays and used cars also climbed, possibly in the aftermath of severe wildfires in Los Angeles.

The report incorporated new weights for the consumer basket to try to more accurately capture Americans’ spending habits, which resulted in minimal revisions to the CPI last year.

Seasonal adjustments to January data were also minimal, and failed to offset the turn-of-the-year price hikes. As a result, “the sharp increase in the core CPI is less alarming than it first appears”, Sam Tombs, chief US economist at Pantheon Macroeconomics, said. “We recommend waiting for February’s data, when the new seasonal factors look set to dampen the seasonally adjusted index more than in previous years, before judging how the underlying trend has evolved.”

Shelter prices, the largest category within services, advanced 0.4 per cent in January, accounted for nearly 30 per cent of the advance in the overall CPI. Owners’ equivalent rent and rent of primary residence – subsets of shelter – both rose 0.3 per cent.

Excluding housing and energy, service prices jumped 0.8 per cent, the most in a year, according to Bloomberg calculations. While central bankers have stressed the importance of looking at such a metric when assessing the overall inflation trajectory, they compute it based on a separate index.

That measure – known as the personal consumption expenditures (PCE) price index – does not put as much weight on shelter as the CPI, which helps explain why it’s trending closer to the Fed’s 2 per cent target. A government report on producer prices due on Thursday will offer insights on additional categories that feed directly into the PCE, which is due later this month.

Goods costs excluding food and energy rose by the most since May 2023. However, when removing used cars, the index was little changed.

Policymakers also pay close attention to wage growth, as it can help inform expectations for consumer spending – the main engine of the economy. A separate report on Wednesday that combines the inflation figures with recent wage data showed real hourly earnings grew 1 per cent from a year ago. BLOOMBERG