US Inflation Unexpectedly Heats Up, Reinforcing Fed Pause

US inflation unexpectedly accelerated in January, further dampening hopes for near-term interest rate cuts, Bloomberg reports. The news, which follows a Wednesday report from the Bureau of Labor Statistics, is likely to keep the Federal Reserve on hold for the foreseeable future.

The Consumer Price Index (CPI) rose 0.5% last month, exceeding forecasts and marking the largest increase since August 2023. The so-called core CPI, which excludes volatile food and energy costs, also climbed more than anticipated, indicating broad-based inflationary pressures.

"We saw strength across the board – whether you’re looking at energy, food, within core components – and so I think it points to a price environment that still remains difficult as far as the Fed is concerned," said Sarah House, a senior economist at Wells Fargo & Co., to Bloomberg.

The S&P 500 opened lower following the report, while Treasury yields and the dollar spiked. Interest rate swaps, which reflect market expectations, now indicate that traders anticipate only one quarter-point Fed rate cut this year, down from expectations of two cuts prior to the CPI release.

The report highlights the persistence of inflationary pressures, particularly in key areas like shelter, groceries, and airfares. The increase in grocery prices, driven in part by a surge in egg prices due to a recent bird flu outbreak, was particularly notable.

The Fed, however, is likely to view these January figures as partially distorted by seasonal factors. “We think that’s mostly due to residual seasonality—the ‘January effect’—limiting the signal from the hot print," said economists Anna Wong and Stuart Paul in a Bloomberg note.

Despite these potential seasonal factors, the report further solidifies the Fed's cautious stance on monetary policy. Fed Chair Jerome Powell, who is scheduled to speak before the House today, emphasized on Tuesday that the central bank is in no rush to cut rates. He also acknowledged the need to assess the “net effect” of the administration’s policies, including tax and immigration measures, on the broader economy.