The Federal Reserve’s battle to rein in inflation continues, with Tuesday’s US consumer inflation report expected to show prices rising briskly from the prior month. The Consumer Price Index (CPI) is forecast to rise 0.4% month-on-month and 6.2% year-on-year, while the core CPI is seen increasing 0.3% and the annual rate dropping to 5.5%.[0]
The US central bank has raised lending rates aggressively in recent months to try to slow down demand.[1] So far all it has achieved is to take the rate from more than three times higher than the three per cent upper limit of its target to a little over twice as high.[1]
The Fed has clearly telegraphed that its upcoming moves will be two more 0.25-percentage-point interest-rate hikes at its March and May meetings, but if the January CPI report looks concerning, the terminal rate—the highest the Fed will take interest rates before cutting them back down—could go even higher or stay in place longer.[2]
Some Federal Reserve officials have expressed concern that the robust employment market could result in wage increases that could fuel inflationary pressures.[3] Jerome Powell, the Chair of the Federal Reserve, has stated that the record-breaking inflation of recent times is starting to abate.[3] In early June, however, he signaled that the Federal Reserve will persist in increasing interest rates to bring inflation back to the desired rate.[4]
Analysts predicted that the Federal Reserve will increase the target range of the federal funds rate to 4.75-5% via a 25 basis point hike at their meeting on March 22, as indicated by the CME FedWatch tool. According to 30-day Fed Funds futures, traders anticipate a possibility that the target rate could exceed 5.2% by the end of the year.
Data released on Tuesday showed the annual headline CPI inflation rate slowed to 6.4% in January from 6.5% in December—the lowest level in 15 months, but still above the 6.2% median estimate of economists.[5] The increase in the core reading—which strips out particularly volatile items like food and energy—tapered to 5.6% over the past 12 months from 5.7%, though still also came in above expectations.[6]
0. “Fade The CPI; Here’s What Matters To The Fed, S&P 500” Investor’s Business Daily, 13 Feb. 2023, https://www.investors.com/news/economy/fade-the-cpi-inflation-report-what-matters-to-the-fed-sp-500
1. “U.S. inflation barely budges to 6.4% as food, gas and shelter get more expensive” CBC News, 14 Feb. 2023, https://www.cbc.ca/news/business/us-inflation-cpi-1.6747463
2. “Markets Brief: January CPI Report Forecasts Show a Bump in the Road to Lower Inflation” Morningstar, 10 Feb. 2023, https://www.morningstar.com/articles/1136947/markets-brief-january-cpi-report-forecasts-show-a-bump-in-the-road-to-lower-inflation
3. “US inflation eases again for seventh consecutive month” The Guardian, 14 Feb. 2023, https://www.theguardian.com/business/2023/feb/14/us-inflation-eases-seventh-consecutive-month
4. “CPI: Prices rise 6.4 percent in January, seventh month of easing inflation” The Washington Post, 14 Feb. 2023, https://www.washingtonpost.com/business/2023/02/14/inflation-easing-cpi-january/
5. “January CPI may challenge assumptions about inflationary risk” Axios, 13 Feb. 2023, https://www.axios.com/2023/02/13/inflation-january-cpi-preview
6. “6-month T-bill rate goes above 5%, 1-year rate sits on the edge after January CPI” MarketWatch, 14 Feb. 2023, https://www.marketwatch.com/story/treasury-yields-ease-ahead-of-u-s-inflation-report-d5cd48b7