Rate cuts not coming soon as US inflation stays elevated

Rate cuts not coming soon as US inflation stays elevated


CPI up 3.1pc in Jan, far above the Federal Reserve’s 2pc target

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WASHINGTON (Reuters/Web Desk) – Federal Reserve policymakers waiting for more evidence of easing price pressures before they cut interest rates may find themselves waiting a bit longer, after a government report on Tuesday showed US inflation stayed elevated last month.

The consumer price index (CPI) was up 3.1 per cent in January from a year earlier, down from its 3.4pc pace in December but more than the 2.9pc economists polled by Reuters had been expecting. Underlying core inflation, which strips out energy and food prices, rose 3.9% from a year earlier for a second straight month.

That stickiness is not going to add to Fed confidence that inflation, while down from its 40-year-high in mid-2022, is truly on a path to its 2pc goal.

It is certainly not a good sign for countries like Pakistan where inflation is stubborn and interest rates are record high, meaning that the dollar will go stronger for being the safe haven currency – a trend already witnessed globally amid the delay in US rate cuts.

The Fed last month kept its policy rate in the 5.25pc to 5.5pc range, where it has been since last July, and while Fed Chair Jerome Powell noted progress, he also said March, when the policymaking committee next meets, would likely be too soon for the Fed to be sure it has won the fight with inflation.

With the job market still strong – US employers added more than 350,000 jobs in January, a report earlier this month showed – still-too-high inflation gives the US central bank little reason to rush on rate cuts.

After Tuesday's inflation report, traders previously betting on a rate cut at the Fed's April 30-May 1 meeting now see June as more likely.

“If this keeps up with another month or two of inflation staying high, you can kiss a June (rate cut) goodbye and we’re probably looking at September,” said Peter Cardillo, chief market economist at Spartan Capital Securities. "It’s a hotter-than-expected report and it is part of what the Fed has been alluding to when it says it’s too early to say that inflation has been beaten."

Speaking after the report, both US Treasury Secretary Janet Yellen and National Economic Council director Lael Brainard, both former top-ranking officials at the central bank, said they continued to see good progress on inflation.

But while some of the more prominent pocketbook items did ease – gasoline prices fell 3.3pc over the month – others, notably food, continued rising.

A big part of the CPI's strength in January was an acceleration in shelter costs, up 0.6pc on the month from 0.4pc a month earlier.

The Fed targets 2pc inflation by a different measure, the personal consumption expenditures price index, which gives less weight to the shelter component – moving some economists to predict that the CPI report won't bust Fed confidence in inflation's decline after all.

Indeed, the January report left some parts of the Fed's disinflation story intact, with prices for goods continuing to fall. Excluding food and energy, goods prices dropped an overall 0.3pc over the month, with clothing down 0.7pc and used cars down 3.4pc.

But it also left Fed officials still waiting for a drop in housing inflation that many insist will arrive in coming months as new leases, less subject to the high rates of increase seen earlier in the pandemic, work their way into the government's inflation index.

The report also showed services inflation continuing to rise, with medical services up 0.7pc and airfares up 1.4pc.

"This was a broad-based increase in core services that justifies the Fed's "wait-and-see" decision," said Inflation Insights' Omair Sharif. "We had some good disinflation data over the second half of 2023, but it was never going to be a straight line down, and some bumps along the road were to be expected."


The dollar traded near three-month highs to major peers on Wednesday as traders pushed back bets for a first Federal Reserve interest rate cut following surprisingly hot US inflation figures overnight.

The US currency's push above 150 yen for the first time since Nov 17 spurred Japan's top currency diplomat to hint at the risk of intervention if "rapid," "speculative" yen declines continue.

The dollar-yen pair tends to track long-term US Treasury yields, which surged overnight and then pushed to a fresh 2-1/2-month peak of 4.33pc on Wednesday.

Meanwhile, the dollar index – which measures the US currency against six major peers, including the yen, euro and sterling – traded just below Tuesday's three-month high of 104.96.

The euro was steady at $1.0710, after dipping to a three-month low of $1.07005 overnight.

The British pound was little changed at $1.2594, after dropping about 0.3pc on Tuesday. That was well above recent lows though, with robust UK economic data suggesting the Bank of England will be slower than major peers in cutting rates.

The Australian dollar languished near a three-month low of $0.6443 reached overnight, last trading at $0.64545.