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US inflation: Surprise spike in January blindsides Fed, bursts rate-cut hopes

US Core Consumer Price Index experienced an unexpected 0.4% increase from December

Federal Reserve Board Chair Jerome Powell holds a news conference after the Fed raised interest rates by a quarter of a percentage point following a two-day meeting of the Federal Open Market Committee (FOMC) on interest rate policy in Washington, US, March 22, 2023. —Reuters
Federal Reserve Board Chair Jerome Powell holds a news conference after the Fed raised interest rates by a quarter of a percentage point following a two-day meeting of the Federal Open Market Committee (FOMC) on interest rate policy in Washington, US, March 22, 2023. —Reuters

US consumer prices surged in the early months, quashing expectations for a continued drop in inflation and likely postponing any Federal Reserve interest-rate cuts,  Bloomberg reported. 

The core consumer price index (CPI), excluding food and energy costs, experienced an unexpected 0.4% increase from December, marking the most significant rise in eight months. 

Annually, it climbed by 3.9%, in line with the prior month. Economists consider the core gauge a superior indicator of underlying inflation, outpacing the overall CPI, which increased by 0.3% from December and 3.1% from a year ago.

This development dims the already faint prospects of immediate interest-rate cuts by the Fed, potentially reviving discussions about resuming rate hikes. 

Some policymakers stress the need for a more comprehensive easing of price pressures before considering rate cuts. 

The S&P 500 opened lower, and Treasury yields surged following the release from the Bureau of Labor Statistics, leading traders to adjust expectations, with March rate-cut odds nearly reduced to zero.

The figures reflected increased prices in food, car insurance, and medical care, with shelter costs contributing to over two-thirds of the overall increase. 

Recent annual revisions confirmed the recession of inflation at the end of 2023, and new weightings from January figures will slightly boost the CPI outlook for the year. 

Policymakers emphasise a sustained moderation in shelter prices as crucial for bringing core inflation down to the Fed’s target.

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