US inflation cools slightly
US inflation is slowing down albeit at a snail’s pace.
For the seventh consecutive month the inflation rate fell to 6.4% in January, a 0.1% drop from December. While this is the lowest reading since October 2021 – and far lower than a peak of 9.1% last summer – January’s cooling is more modest than market forecasts of 6.2%.
Oil and electricity prices saw the biggest falls, as did the prices of used cars and trucks. However, services inflation showed little sign of easing while the cost of food and natural gas rose. So did the cost of gasoline, which jumped 1.5%, reversing a 1.5% decline in December.
Housing costs are also helping to push inflation figures high, with the Shelter CPI index moving up to 7.9% from 7.5% the month before, rendering it the highest rate of housing inflation since 1982.
Investors are unsure what to make of these new figures. The S&P 500 fluctuated between small losses and gains this afternoon while U.S. government bond yields rose.
Today’s data has merely confirmed that “America’s inflationary dragon is far from slain,” says James Bentley, director of Financial Markets Online. Bentley also points to January’s recent huge job numbers “which took the markets by surprise and showed that America’s economy is generating new jobs at a prodigious rate.” Indeed, over the last month, the US added over half a million new jobs, roughly three times the figure which economists had been expecting.
All this leaves the more hawkish Federal Reserve with an even greater conundrum. Keep raising rates to slay the dragon or slow down the pace to avoid tipping into recession?
Most analysts reckon the Fed will continue raising interest rates until at least the middle of the year but more gently. Although evidence of the strength of the US jobs market is encouraging, some Fed officials are concerned the tight labour market will lead to wage rises which feed into inflationary pressures. “Labour market momentum gives the Fed’s rate setters a free hand to hike interest rates further and faster if they deem it necessary,” says Bentley.
All eyes now are on the UK’s January inflation figures which are due tomorrow. These are expected to show that annual consumer price growth slowed for a third consecutive month in January, falling to 10.3 per cent, from 10.5 per cent in December. The US slow-down will give more room for optimism as inflationary pressures around the world at last appear to be cooling after the gloominess of the last year.
That said, there’s a fine balance to be struck between optimism and caution. As Jim Sarni, a managing director at asset manager Payden & Rygel, puts it: “Last year, we had too much pessimism, but right now, we have a market that has got ahead of itself and is a little too optimistic.”
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