10 months ago • 1 min
Roses are red,
violets are blue,
with inflation still hot,
what will the Fed do?
All in all, the US inflation data wasn’t the valentine that investors were hoping for.
Overall, prices rose by 6.4% on an annual basis in January (yellow line), marking their seventh-straight monthly decline. But they saw only a slight cooling from December’s 6.5% pace, and investors had been hoping for a sharper cooldown.
The story was similar across the consumer price index’s “core” measure (white line), which excludes the prices of more volatile stuff like food and energy. Core inflation was also hotter than expected, but a touch cooler than the month before, at 5.6%, compared to December’s 5.7%.
Prices fell on used cars, medical care, and airfares. And, one of the critical measures that the Fed looks at – core services, excluding shelter – suggests that wage inflation, at least, has begun to wane.
But certain other items – many of them essential like energy, food, and shelter (which drove nearly half of the increase) – kept inflation elevated. That suggests a continuing burden on consumers and more work ahead for the Federal Reserve (the Fed), which has been raising interest rates for nearly a year to try to reestablish price stability in the economy.
For now, at least, with inflation cooling, but cooling slowly, the Fed could be forced to hike rates higher, and keep them higher for longer, to bring inflation back toward its long-term 2% target. It’s a scenario that could weigh on risk assets, such as stocks. That’s without considering the wildcard impact of China’s reopening and the expected spending and growth boom that it’s expected to trigger.
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