Sticky Inflation Sticks It to an Early Fed Rate Cut

Anyone holding out hope for a March cut in the federal funds rate by the Federal Reserve should pack it away now. The Consumer Price Index was up 0.3% month-over-month in January 2024 on a seasonally adjusted basis. Over the last 12 months, it was 3.1%. That’s down from the 3.4% of December 2023.

That the Federal Reserve would cut interest rates early had been, to put it politely, a stretch, though not impossible. Fed Chair Jerome Powell outright said it in January. “Based on the meeting today, I would tell you that I don’t think it is likely that the Committee will reach a level of confidence by the time of the March meeting,” he said.

Things could have been better in January, but, once again, the big driver of inflation was shelter, which contributed more than two-thirds of the jump, a 0.6% month-over-month step up. Within shelter, the real culprit was owners’ equivalent rent, up 0.6% month over month, compared to rent increasing 0.4%. But it wasn’t the only contributor. Food jumped 0.4%.

The index for core inflation — all items but food and energy because their volatility makes forecasting and comparisons difficult — was also up 0.4%. The larger growth items were, again, shelter, but also motor vehicle insurance and medical care. On a 12-month basis, that was 3.9% growth, significantly higher than the 3.4% in December. Energy, excluded from core inflation, was down 0.9% between December and January, largely due to a drop in gasoline prices.

To complicate matters, real average hourly earnings for employees — so, after inflation — were up 0.3% month over month and up 1.4% seasonally adjusted between January 2023 and January 2024. That could set off a reaction at the Fed as many of the members assume that rising labor costs are always a significant driver of inflation, although in the post-pandemic era, supply chain problems and corporate pricing power seem more likely.

“January’s core CPI printed slightly hotter than expected (+3.9% YoY) on stronger-than expected services,” wrote Gargi Chaudhuri, Head of iShares Investment Strategy, Americas, BlackRock, in prepared emailed remarks. “While the current levels of inflation are gratifying compared to what we saw one year ago, we still think it is too strong to warrant an interest rate cut at the next FOMC meeting. We believe 3-4 interest rate cuts are plausible for 2024, but we don’t expect the first cut to arrive until at least May since the Fed noted they want to have “greater confidence” in inflation’s downward trajectory. In response to the inflation data, yields jumped up 14bps in the belly of the curve and stock future indicate a lower open.”