Inflation is heading in the wrong direction, prompting financial markets to reconsider their monetary policy expectations.
“Biden inflation up!” President Donald Trump said in a Truth Social post shortly after the January consumer price index (CPI) report.
“I would say we’re close, but not there on inflation,“ Federal Reserve Chair Jerome Powell told the House Financial Services Committee during his semi-annual monetary policy report testimony. ”Last year, inflation was 2.6 percent—so great progress—but we’re not quite there yet.”
Core inflation, a measure that removes the volatile energy and food components, ticked up to a higher-than-forecast 3.3 percent. The core CPI also rose by 0.4 percent monthly, slightly above the consensus estimate of 0.3 percent.
“January was hot, hot, hot—for inflation,” said Mark Hamrick, senior economic analyst at Bankrate. “This marks backtracking for the journey toward lower prices and price stability.”
While statisticians found broad-based price pressures from higher energy, food, and shelter costs, the report indicated two factors that accounted for a significant share of the hotter boost.
Food prices surged 0.4 percent and climbed to 2.5 percent in the 12 months ending January. Supermarket costs also jumped 0.5 percent from December to January.
The most notable jump in the food index was the price of eggs, which climbed 15.2 percent over the month.
“This was the largest increase in the eggs index since June 2015 and it accounted for about two thirds of the total monthly food at home increase,” the Bureau of Labor Statistics said.
The average price for grade A large eggs is at an all-time high of $4.95, fueled by the devastating and ongoing bird flu outbreak that has destroyed supplies. Additionally, farmers have endured elevated energy, feed, and labor costs, adding to higher input price pressures.
“Millions of egg-laying hens were culled to prevent the spread of the virus, drastically reducing the supply of eggs in recent months,” LPL Financial’s chief economist Jeffrey Roach said in a note to The Epoch Times.
“This reduction in supply, coupled with ongoing supply chain disruptions and increased production costs, has led to the historic increase in egg prices.”
The shelter index rose by 4.4 percent year over year, the smallest 12-month increase since January 2022. It also edged up by 0.4 percent month over month and accounted for 30 percent of the monthly increase.
While Powell and others had anticipated that shelter inflation would have fallen by now, the Fed chief told lawmakers that downward changes in rent prices would not immediately translate to overall shelter cost adjustments in inflation data.
“Market rents don’t make their way into rents until existing leases turn over,” Powell said. “That’s been the slow part of the process.”
Whether the recent relief will last is unclear, says Sheharyar Bokhari, a senior economist at Redfin.
“Prices will keep going up consistently because it’s unlikely there will be enough new inventory to meet buyer demand,” Bokhari said.
On the energy front, while crude oil prices have been mostly coming down—the U.S. benchmark for oil prices has tumbled 11 percent over the last month on the New York Mercantile Exchange—the report’s energy index has risen (1.1 percent). This is because gasoline climbed 1.8 percent, fuel oil surged 6.2 percent, and utility-piped gas service advanced 1.8 percent.
Gas prices have risen ahead of the spring’s annual maintenance work at refineries. Due to various outages, the work is expected to accelerate on the West Coast this year.
“Refinery issues are creating localized disruptions, particularly on the West Coast, where a refinery fire and the transition to summer gasoline are pushing prices higher,” Patrick De Haan, head of petroleum analysis at GasBuddy, said in a note.
What This Means for the Fed
Larry Tentarelli, chief technical strategist at Blue Chip Daily Report, says the inflation data should serve as a cautionary tale.“We view today’s above forecast January CPI report as a cautionary development, as the markets continue to focus on the Fed’s next move,” Tentarelli said in a note emailed to The Epoch Times.
Indeed, stocks tanked immediately after the January CPI report, though they recovered throughout the Feb. 12 trading session. The 10-year Treasury yield shot above 4.63 percent, and the U.S. dollar index picked up 0.4 percent.
Investors are focused on how the Federal Reserve will respond.
Powell reiterated to Congress that the Fed does not get too excited or too worried about isolated reports. Instead, the monetary authorities examine trends and developments, he noted.
The 3- and 6-month annualized changes in the CPI stand at 4.5 percent and 3.6 percent, respectively.
Despite Trump urging the Fed to lower interest rates, Powell signaled during his two days on Capitol Hill that the Fed is not in a hurry to cut the federal funds rate.
“With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance,” Powell said.
He added that reducing policy restraint too quickly could reverse the institution’s progress on inflation, while easing the Fed’s restrictive stance could weaken economic activity. Powell and his colleagues have signaled that they have the luxury of waiting to enact policy changes because growth remains solid and the labor market is intact.
Market watchers think the Federal Reserve will keep interest rates higher for an extended period until there is clear evidence of inflation returning to the path of deceleration.
Charlie Ripley, senior investment strategist at Allianz Investment Management, suggests investors might need to reconsider interest rate cuts this year.
“Overall, today’s inflation data should force market participants to re-think the Fed’s ability to cut rates this year, especially considering the rise in prices is likely unrelated to any tariff activity from the White House,” Ripley said in a note emailed to The Epoch Times.
Although Powell ruled out a rate hike during his post-meeting press conferences, Northlight Asset Management CIO Chris Zaccarelli believes markets will start mulling a possible increase as the next policy decision if the upward inflation trend continues.
“The increase in inflation metrics completely takes away the ability of the Fed to cut rates and although it’s too early to predict that they will begin raising rates any time soon, the market is going to start seriously considering that the next move the Fed makes—even if it is in late 2025 or early 2026—is going to be a hike and not a cut,” Zaccarelli said in a note emailed to The Epoch Times.
The Inflation Outlook
Officials will digest a few more inflation reports before the Fed’s next two-day policy meeting on March 18 and 19.The next key figure is the January producer price index, which gauges the prices businesses pay for goods and services. Economists anticipate a decline from the previous month.
According to the Cleveland Fed’s Inflation Nowcasting model, inflation in the Fed’s preferred personal consumption expenditure (PCE) price index is expected to dip to 2.5 percent from 2.6 percent later this month.
As for next month’s CPI report, the annual inflation rate could ease to 2.8 percent.
“Just like consumers, the Federal Reserve wants to see further cooling of inflation,” Hamrick said. “Officials are in wait-and-see mode with respect for potential economic impacts stemming from Trump administration decisions including imposition of tariffs and any retaliation by targeted nations.
“There’s more inflation and employment data to digest before the next scheduled announcement from the Fed on March 19. It is hard to make the case for a rate cut at this point.”
Monitoring Tariffs
While potential tariff effects will not appear in the economic data for some time, the Fed is closely watching Trump administration policies to determine what necessary actions, if any, are needed.“The underlying economy is very strong, but there’s some uncertainty out there about new policies,” Powell said. “We’re just going to have to wait and see what the effects of those policies are before we think about what we can do.”
He said that tariffs could cause the economy to evolve in different ways but that the Fed will not know until the policies are fully implemented.
A recent S&P Global forecast suggests that tariffs could cause a one-time price increase of between 0.5 percent and 0.7 percent. Boston Fed researchers project that tariffs on Canada, Mexico, and China could raise core inflation by as much as 0.8 percentage points.
A chorus of Fed officials, including Chicago Fed President Austan Goolsbee, has expressed concern that tariffs could cloud inflation data, making it harder to craft monetary policy.
The White House confirmed that more details about the president’s proposed reciprocal tariffs will be revealed on Feb. 13.
