U.S. equities traded in a choppy fashion after the stronger-than-expected U.S. Consumer Price Index (CPI) for January showed that inflation remained resilient despite aggressive interest rate hikes by the Federal Reserve in 2022, which boosted up fears of more hawkish moves from the Fed.
The annual CPI inflation rate eased to 6.4% from 6.5% the prior month, against expectations of 6.2%. The monthly CPI rose 0.5%, in line with forecasts, but a lot hotter than the prior two months.
The monthly core CPI rose 0.4% from December, above the 0.3% expected. The annual core CPI rate eased to 5.6% vs. 5.7% in December and forecasts of 5.5%. The core inflation rate peaked in September 2022 at a 40-year-high of 6.6%.
The strong January jobs report and the improved global growth outlook have put policymakers on guard against a renewed increase in price pressures, which poses the risk of making inflation becoming entrenched.
At present the market is widely expecting the Fed to hike interest rates by 25 basis point in March and May; however, after the CPI report, odds of a third Fed rate hike by July rose to 60% from just below 50% before the release of the data.
Given that inflation is not falling fast enough, according to New York Federal President John Williams the risks are that inflation stays higher for longer than expected, the Fed might need to hike rates higher than currently anticipated.
While Tuesday’s inflation data showed consumer prices moderated more slowly than expected in January, Wednesday’s retail sales report suggested consumer spending was strong last month.
Retail sales beat consensus by a long shot, rising a seasonally adjusted 3% in January, well above estimates of 1.7% rise, following December’s 1.1% fall.
It is looking like the U.S. economy could have a good first quarter and recession fears are abating. The resiliency of the consumer is another sign that areas of the economy remain robust. The data-dependent Fed is seeing more ongoing rate increases after inflation accelerated in January and retail sales rebounded sharply.
