US inflation data changes little for Fed - Pantheon Macroeconomics

(Alliance News) - Both the Federal Reserve's hawks and doves will find "something to highlight" from Tuesday's US inflation reading, analysts at Pantheon Macroeconomics commented.

The Fed is still expected to lift rates by 25 basis points next month, despite the inflation reading coming in hotter-than-expected.

According to the Bureau of Labor Statistics, the US annual inflation rate cooled to 6.4% in January, from 6.5% in December. According to consensus cited by FXStreet, the rate of inflation was expected to ebb to 6.2% last month.

Nonetheless, it was the slowest rate of annual inflation since October 2021.

"It's slightly higher than most analysts had expected, but it's nothing too dramatic. All other reports were in line with expectations," deVere Group analyst Nigel Green commented.

On an annual basis, core inflation stood at 5.6%, slowing slightly from 5.7% in December. The US Bureau of Labor Statistics said this was the smallest increase in 12-month core inflation since December 2021.

Pantheon Macroeconomics analyst Ian Shepherdson said that while core services prices are "still sticky", "no one's mind will be changed by this report".

"In short, this report won't change anyone's mind about the inflation picture; both hawks and doves will find something to highlight. It does not change the very high likelihood of a 25bp hike in March, and it says nothing about May; that's too far off," Shepherdson commented.

According to the CME FedWatch Tool, a 25 basis point hike is expected at the US central bank's March meeting, with only 9.2% of the market anticipating a larger 50 basis point hike.

For May, 75% expect another 25 basis point hike.

Quilter Investors analyst Marcus Brookes said the market should not be complacent, though. It is too early to declare that the Fed's job is done, Brookes explained.

Brookes added: "While the year-on-year figure is disappointing, the monthly figure is trending in the right direction and the Fed should feel comfortable enough to stop raising rates soon, but as ever inflation is going to dictate things. However, this data shows that markets would be wise not to get ahead of themselves. Core inflation continues to be stickier than many would like, while the jobs market is showing significant resilience. Just recently, we saw a surge in employment, highlighting the fact the US economy is holding up in the face of rising rates and inflationary pressures."

By Eric Cunha, Alliance News news editor

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