Headline, all-items Consumer Price Index (CPI) inflation fell again in January, but not by as much as economists had projected before this morning’s report from the Bureau of Labor Statistics. In January prices rose at 3.1% year-over-year. That’s a slower increase than the 3.4% annual rate notched in December.
But economist had projected that inflation would dip to a 2.9% annual rate. And stocks dropped on the disappointment.
The core index, which excludes more volatile food and energy prices, rose at a 3.9% annual rate in January. That was the same rate of increase as in December.
The Standard & Poor’s 500 fell 1.37% on the day, and the NASDAQ Composite fell 1.8%. The Dow Jones Industrial Average closed down 1.35%.
The yield on the 10-year Treasury rose 14 basis points to 4.32% as bond prices fell.
The inflation news also shifted investor expectations for when the Federal Reserve will begin to cut rates. According to the CME FedWatch Tool, which calculates the odds of a Fed move from prices in the Fed Funds Futures market, the odds of an interest rate cut at the March 20 Fed meeting are down to just 8.5%. The odds of a March 20 cut were 16.0% yesterday, February 12. The 91.5% odds for no cut at the meeting are up fom just 19% on January 12.
The odds that the Fed will hold rates steady at its May 1 meeting rose also to 66.1% toes from 39.3% yesterday and 0% on January 12.
The market is starting to think June.
Can the fed actually control inflation created by government policy? It appears a large source of inflationary pressure is being driven by the federal and local government’s. At the federal level record levels of deficit spending increasing the money supply (inflationary); and new regulations forcing people to buy more expensive EV’s and more expensive renewable energy (inflationary). As well as at the local level zoning boards and activist’s putting in regulations that significantly constrain the supply of housing causing housing costs and rent prices to rapidly increase housing prices. Which also pushes insurance rates higher… Then underinvestment in transportation….. I see a pattern of government regulations driving inflation, how much does the private sector have to be culled to compensate for the public sector’s inflationary policies? Can and does the fed want to fight the government policies that are continuing inflation? My prediction is that the fed is going to hold tight for a lot longer than we think, and if government continues on the path it is now we could see additional tightening.