- January CPI heated up on both the headline and core figures, missing expectations to the high side
- Retail sales slumped by the most in nearly two years
- Market shrugs off inflation print as 10-year yields fall below 4.50%
The Fed’s New Year’s resolution—to continue to decrease inflation to their 2% goal—faced a setback this month. The January Consumer Price Index (CPI) figure increased for the fourth straight month, posting the highest headline print since August of 2023. The Federal Open Market Committee’s (FOMC) decision to cut interest rates by 25 bps at the December 2024 meeting, despite inklings of persistent inflationary pressures on the economy, looks questionable in hindsight (and looked questionable at the time).
The headline CPI rose 0.5% last month, the most in a year and a half, led by a range of household expenses like groceries and gas. The recent surge in grocery prices was specifically due to higher egg prices in the wake of a deadly bird flu outbreak, as egg prices rose more than 15% from December, the largest increase since June 2015. That accounted for about two-thirds of the total monthly increase in grocery prices. Excluding often-volatile food and energy costs, the core CPI also climbed by more than forecast, reflecting higher prices for car insurance, airfares, and a record monthly increase in the cost of prescription drugs. The shelter component came in higher due to a jump in hotel prices, while both owners’ equivalent rent and primary rents held flat at 0.3%. Adding to the worry, supercore inflation rose to almost 0.8% month over month.
Fed officials who touted a slowdown in price pressures over the second half of 2024 are taking some solace in the seasonal adjustments that were released with this print. Each year, the Bureau of Labor Statistics recalculates seasonal adjustment factors with the release of the January CPI, and these revisions strengthened the disinflation narrative of last year, as both three- and six-month annualized core CPI were revised down to 3.1%.
The Fed chair met with the Senate Banking Committee on Tuesday of this week, where he reiterated that the central bank doesn’t need to rush to adjust interest rates, again signaling that officials will be patient before lowering borrowing costs further. He also declined to engage on any questions centered around new policies coming from the Trump administration, a continuation from his most recent press conference.
Meanwhile, U.S. retail sales hit the skids in January, falling by the most in almost two years, signaling a consumer spending pullback from the excesses of the 2024 holiday season. Month-over-month retail sales fell by 0.9% from the previous month’s positive 0.7%. Additionally, consumer sentiment fell for the second consecutive month as near-term inflation views rose sharply. This one-two punch mitigated much of the hot CPI print, and interest-rate swap contracts priced in 37 basis points of cuts this year versus the 28 that had been expected post-CPI.
The mixed messages coming from the economic prints likely did nothing to change the outcome of the next Federal Reserve meeting. They were on track to hold rates steady, and despite the retail sales and consumer sentiment information, they’re likely still on hold. While the Fed is data dependent and will react to economic prints, the other half of the equation lies with the Trump administration. At his last press conference, Powell said the Fed was in a wait-and-see mode regarding new policies and their economic effects. The next Fed meeting will be just over halfway into Trump’s first 100 days in office, and we may finally get to hear what the Fed thinks about the whirlwind of political activity coming from Pennsylvania Avenue.
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