CPI Report out – Inflation at 6.4%; What Will Fed Do?

YEREVAN (CoinChapter.com) – The US inflation has ballooned to 6.4% in January, standing 0.5% above December statistics, according to the latest consumer Price index (CPI) report from the Bureau of Labor Statistics.

The alarming results came after the Federal Reserve had somewhat cooled its hawkish approach and planned to ease the interest rate hikes in the year ahead. Here’s a short rerun of the report and its possible implications. 

Shelter Costs Lead US Inflation Up

The report specified that the index for shelter was “by far the largest contributor” to the monthly all-items increase, accounting for nearly half of it. Food, gasoline, and natural gas indexes also contributed to the growing inflation. 

The food index increased 0.5% over the month, with the food at home index rising 0.4%. The energy index increased 2.0% over the month as all major energy component indexes rose over the month.

read the report.

Notably, the fuel price led the pack with a 27.7% inflation but registered a 1.2% monthly decline, as seen in the chart above. Additionally, the used cars and trucks industry saw a decline in prices by 11%. 

However, Greg McBride, the Senior Vice President & Chief Financial Analyst at Bankrate, told CoinChapter that the fallen prices in the used car sector “don’t help.”

Used car prices have fallen 6 months in a row, but this doesn’t help unless you are in the market or expect to be in the market for a used car. This isn’t something providing relief to the budgets of households that already have a car.

asserted the expert.

What does it mean for the economy?

A CPI increase beyond expectations is likely to evoke a return of hawkish interest rate hikes from the Fed.

In short, an increase in interest rates is one of the tools to fight the progressing inflation. As a result, the central bank makes borrowing money more expensive, slows down the economy, and, in turn, boosts the US dollar’s purchasing power. 

However, a slower economy and interest rate hikes also threaten the market with a recession, which has been a concern for months. Thus, a CPI increase reignites the recession fears and threatens the stock market with another leg down after the 8% relief rally year-to-date.

Also read: Dec 2022 CPI report shows 6.5% core inflation – what to expect from Fed?

Experts see more hawkish policies underway

Meanwhile, several experts weren’t surprised by the higher CPI results for January. Professor Ernie Goss of Creighton University told CoinChapter that he “expected the January CPI to rise by 0.44% from December’s artificially low -0.1%.”

The Professor also noted that “inflationary pressures in the pipeline were again rising” before the report release. “The Federal Reserve’s work is not done,” concluded Goss.

Not only do I expect the January CPI to rise by 0.44% from December’s artificially low -0.1%, future months’ CPI will be elevated above current expectations due to a significant boost in Social Security payments and the launching of infrastructure projects across the nation.

said the Professor.

Before the report was released, Jon Maier, the Chief Investment Officer at Global X ETFs, underscored the importance of the CPI report for the rest of the fiscal year. However, he expected the CPI statistics to show a cool-off, which they didn’t. 

The CPI report would be crucial in shaping expectations for when the Fed is close to the end of its tightening cycle and is likely to show inflation is starting to move down.

said Maier.

Also read: CPI is a lie – what’s the best gauge of inflation?

McBride also asserted that the current statistics are not surprising, as the previous month’s “moderation” was caused by a 9.4% cut in gasoline prices. 

The decline in the Consumer Price Index seen in last month’s release was aided by a 9.4% decline in gasoline prices, which have since reversed course. Without gasoline prices dragging the CPI lower, the results won’t be as rosy as what has been seen in recent months.

McBride told CoinChapter.