Inflation Sticks at 6.4% In January, With Core Prices Quickening, Complicating Fed Battle

Core consumer prices edged higher last month, while headline readings decline, adding further complexity to the Fed’s inflation fight.

Updated 8:47 am EST

U.S. inflation declined at a lower-than-expected pace last month, data from the Bureau of Labor Statistics indicated Thursday, indicating that the Federal Reserve‘s reluctance to declare and end to its inflation fight is supported by events in the broader economy.

The headline consumer price index for the month of January was estimated to have risen 6.4% from last year, matching the 6.4% pace recorded in December and largely in-line with the Street consensus forecast.

On a monthly basis, inflation was up 0.5%, the BLS said, compared to a revised 0.1% reading in December and the June peak of 1.3%. Street forecasts had projected a 0.5% acceleration.

So-called core inflation, which strips-out volatile components such as food and energy prices, rose 0.4% on the month, and 5.6% on the year, the report noted, with the annual reading topping Street forecasts.

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On Wall Street, U.S. stocks reacted to the expected readings by paring earlier gains, with futures tied to the S&P 500 indicating a point 5 point opening bell decline and those linked to the Dow Jones Industrial Average priced for a 30 point decline.

Benchmark 10-year Treasury note yields were little-changed at 3.701% in volatile trading while 2-year notes were pegged at 4.501%. The U.S. dollar index, which tracks the greenback against a basket of its global peers, was marked 0.60% lower at 102.722.

The CME Group’s FedWatch is now pricing in an 87.8% chance of a 25 basis point Fed rate hike on March 22, down from 90.8% last week, with the odds of a follow-on hike in May — either 25 or 50 basis points — pegged at around 80%.

Earlier this month, Federal Reserve Chairman Jerome Powell said that the January jobs report, which showed a net increase of 517,000 new positions, “shows why it will take a significant period of time” to tame domestic inflation.

“The reality is if we continue to get strong labor market reports or higher inflation reports, it might be the case that we have to raise rates more” than is now expected,” Powell said, adding that it would likely take a year to bring headline inflation back to the Fed’s 2% target — a target his said would remain firmly in place — given what he described as ‘structural’ shortages in the labor market.

“The labor market report underscores the message I sent during last week’s press conference,” Powell said. “There’s been an expectation that inflation will go away quickly and seamlessly, but I don’t think that’s the case. It’s going to take some time.”

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