The US consumer price index rose at a rate of 6.4 per cent in January compared to a year earlier, a smaller decline than expected.
Economists had been expecting a deceleration in the annual CPI to 6.2 per cent from the 6.5 per cent pace recorded in December, according to the consensus forecast published by Reuters.
Stripping out energy and food prices, the “core” CPI measure rose at annual rate of 5.6 per cent in January, also slightly below the 5.7 per cent rise the previous month. This compared to economists’ expectations of a 5.5 per cent gain in the year-on-year measure.
The January inflation data was being closely watched as vital guidance to investors, economists and US central bankers. An unexpectedly strong jobs report for last month stoked expectations that the Fed might have to be more aggressive in tightening monetary policy to cool the economy.
After an initial bout of volatility, stock futures and government bonds rallied. Futures for the S&P 500 were up 0.6 per cent shortly after the release of the CPI data, while the yield on the two-year US Treasury dropped 0.05 percentage points to 4.48 per cent.
The Fed has already lifted interest rates from near-zero to a target range of between 4.5 and 4.75 per cent over the past year. As inflation has eased since peaking last summer, the central bank has slowed the pace of its rate rises, from increases of 75 and 50 basis points in the second half of last year to 25 basis points last month.
But Fed officials have continued to stress that their fight against inflation is far from complete, even as some economists and investors are predicting that they might soon pause the interest rate increases and could start cutting rates by the end of the year.
“We are still far from achieving price stability and I expect that it will be necessary to further tighten monetary policy to bring inflation down towards our goal,” Michelle Bowman, a Fed governor, told a gathering of community bankers in Florida on Monday.
“The ongoing tightness in the labour market puts upward pressure on inflation, even if some components of inflation moderate due to improvements in supply-side factors. The longer high inflation persists, the more likely it is that households and businesses may come to expect higher inflation in the longer term,” Bowman said, adding: “Should that be the case, the FOMC’s job of lowering inflation would be even more challenging.”
The enduring strength of the US labour market combined with a gradual easing of inflation has raised hopes that the American economy might experience a “soft” landing, avoiding a recession even while monetary policy is being tightened. But Fed officials have always cautioned that such an outcome is far from guaranteed. If inflation proves to be more stubborn than expected, the central bank would have to raise interest rates higher for a longer period of time to bring price pressures down to its average 2 per cent target. This in turn might lead to a larger hit to output and employment in the future.
Economists and officials have been especially concerned that inflation in the service sector has been difficult to curb, compared to inflation for goods, which has eased more rapidly.