This week, Portland residents braved the cold to venture outside and watch snow blanket the city. In contrast, January's inflation data was seemingly the opposite, rising higher month-over-month and year-over-year. While the snowfall might have been a pleasant surprise for some Oregonians, this inflation data was anything but for most investors and consumers.
This week's January consumer inflation report (the Consumer Price Index, or CPI) sent ripples through the financial markets on Wednesday morning, contributing to knee-jerk selloffs in both the bond and stock markets that have since reversed as of Friday morning. Both headline (inflation of all goods and services) and core (excluding food and energy) figures came in higher than expected.
Sources: U.S. Bureau of Labor Statistics, FactSet
Source: U.S. Bureau of Labor Statistics, FRED
Headline CPI was buoyed by a substantial 1.1% increase in month-over-month energy costs and continued high food inflation rates. For more insight on high food inflation rates, please see last week’s blog titled, “Tariff Tantrum.” Most notable, though, were month-over-month increases and volatility in specific “core” goods and services categories. Used car prices, transportation services (ex. car insurance, air travel, etc.) and medical care goods all experienced outsized price increases versus prior months in 2024. Lastly, housing and shelter inflation continued to exhibit stability and a downward trend despite remaining elevated from an absolute perspective.
It is important to remember that one month of surprising data is not an explicit cause for alarm, either for consumers or the Federal Reserve. This is an especially important consideration for January’s data, as seasonal data adjustments historically have caused “hotter” inflation datasets compared to other months. Instead, this “surprise” inflation merely indicates extra scrutiny is needed while looking at this data in the following months. That said, the significant increase in political activity experienced in the last month further emphasizes that idea, as both capital markets and economic data are feeling the impacts of the short-term volatility created by rapid policy and leadership change. In order to maintain a strong economy, fiscal leaders must take a measured, calculated and long-term approach. We believe this will manifest through the Fed taking a “wait and see” method relating to future Fed Funds rate cuts, likely via a single rate cut implemented later in the year than was first expected (in contrast to the multiple cuts expected at the end of 2024).
Despite the “surprise” inflation, corporate earnings continue to show higher growth than expected and labor markets remain stable, as evidenced by falling numbers of new and continued weekly unemployment claims. We believe that this indicates that the U.S. economy and its consumers are strong enough to handle the Feds’ current “wait and see” approach to future rate cuts. While one month of data does not make a trend, the combination of slowly declining inflation and measures of corporate and consumer strength creates a legitimate reason to watch closely for such a trend in the coming months.
Takeaways for the Week:
January’s headline CPI was elevated versus expectations, coming in at +0.5% month-over-month and +3.0% year-over-year
Shelter inflation, while still elevated, continues to moderate year-over-year
January retail sales data, released Friday, unexpectedly declined, but many attributed the miss to unusually cold and stormy weather on the East Coast
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