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The pump in January 2023 inflation keeps markets on the edge as analysts expect further rate hikes and monetary tightening during the upcoming FOMC meetings in March and May.
On Tuesday, February 14, the US Labor Department reported the inflation data which stands higher in the first month of January 2023. The Consumer Price Index (CPI), measuring a basket of goods and services, jumped by 0.5% in January 2023.
US Inflation Report
This translates into an annual gain of 6.4% higher than analysts’ expectations of 6.2%. These are clear signs of stick inflation which is certainly not cooling down on the expected lines. Shelter, gas, and fuel prices have been taking a toll on consumers recently.
While excluding energy and food, the core CPI increased by 0.4% on a monthly basis from 5.6% a year ago. This was against the respective estimates of 0.3% and 5.5%. On Tuesday, the markets remained volatile with the Dow Jones Industrial Average (INDEXDJX: .DJI) ending 156 points lower at 34,089.27.
As per the Bureau of Labor Statistics, rising shelter costs alone accounted for half of the monthly increase. This component constitutes one-third of the index and jumped 0.7% on the month and was up 7.9% from a year ago. During the month of December, the CPI had also jumped by 0.1%.
The volatile energy prices also contributed significantly jumping 2% and 8.7%, respectively. On the other hand, the food costs jumped by 0.5% and 10.1%, respectively.
The sticky inflation flashes warning signs that the clouds of the recession still hover over the US economy. Since March 2022, the US Federal Reserve has increased its benchmark rates eight times to the highest in over four decades. Jeffrey Roach, chief economist at LPL Financial said:
“Inflation is easing but the path to lower inflation will not likely be smooth. The Fed will not make decisions based on just one report but clearly the risks are rising that inflation will not cool fast enough for the Fed’s liking.”
Fed Action Going Ahead
The US Federal Reserve recently stated that “disflationary” forces are at play. However, the January 2023 action shows that the central bank has got some more work to do ahead. The rising in housing prices is keeping inflation high, however, the numbers are likely to decelerate ahead in the year.
Thus, some Fed officials recently noted that they are looking at the “super-core” inflation i.e. core services inflation minus shelter prices. This number jumped 0.2% in January and was up by 4% from a year ago.
During the next two FOMC meetings in March and May, the Fed is likely to push the interest rate by 50 basis points taking the borrowing range above 5%. Policymakers are closely evaluating the economic impacts of such a monetary tightening action.
Dallas Fed President Lorie Logan has also cautioned that the central bank might turn aggressive once again. During a speech in Prairie View, Texas, she said:
“We must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions. When inflation repeatedly comes in higher than the forecasts, as it did last year, or when the jobs report comes in with hundreds of thousands more jobs than anyone expected, as happened a couple weeks ago, it is hard to have confidence in any outlook.”
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