January’s US CPI surprise leaves May rate cut in doubt

3.1% headline figure came in 20bps above consensus expectations

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January’s US inflation print surprised to the upside, coming in 20 basis points above consensus expectations at 3.1%, leading commentators to suggest a May interest rate cut could be in doubt.

Despite the headline figure falling 30bps from December’s 3.4% print, the stronger-than-expected data was largely attributed to shelter and food prices rising more than anticipated.

Food ticked up 0.4% in the month, its highest monthly increase since the beginning of 2023.

See also: UK employment growth slows in 2023 but wages outpace inflation

Greg Wilensky, head of US fixed income and portfolio manager at Janus Henderson Investors, said the data came in stronger than either the US Federal Reserve or the market would have wanted or expected.

“While the door for a March cut had already been effectively shut given the recent Fed commentary and the jobs reports, the Fed has now locked the door and lost the key,” he said.

“We do not think a May cut is out of the question, but it makes sense that the odds of a May cut being priced into the market have been substantially reduced.  With this new data, a first cut in June seems like the most reasonable expectation unless we see a very quick, severe drop in labour market activity or a geopolitical shock.”

Rob Clarry, investment strategist at Evelyn Partners, added: “With the Federal Reserve currently deciding monetary policy based on the incoming data, it looks like this print will push back the timeline for interest rate cuts. It comes on the back of stronger-than-expected economic growth, a big upside surprise from the January US jobs report, and resilient wage growth.

“Traders now expect around four interest rates cuts in 2024, which is down from the six expected just over a month ago. Similarly, they have pushed back their expectations of when the first cut will take place – assigning a 30% chance of a cut at the May meeting, which is down from 85% in December.

“Bond yields rose and the dollar strengthened in response to this hot CPI print.”

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Reacting to the print, chief global strategist at Principal Asset Management Seema Shah said the final mile towards the Fed’s 2% target was “always going to be slow, erratic, and frustrating”.

“Today’s data is not what markets or the Fed would have liked to see, but it’s important not to overreact and jump to the assumption that an inflationary resurgence is developing. Inflation has come in slightly higher than expected, partially driven by segments that are less important for the Fed’s favoured core PCE measure, while forward looking indicators suggest they will ease over the coming months.

“What today’s report does emphasise, however, is that without a cooling of the labour market and economy, inflation progress is likely to come to a halt. A March cut is completely off the agenda, but May could still be in play if economic activity plays ball and finally starts to show the impact from prior Fed tightening.”

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