U.S. inflation reaches 6.4% in January

This Tuesday (February 14), the CPI report was released in the world’s leading economy and the figures were disappointing for analysts. Inflation in January in the US reached a rise of 0.5% and during the last year ending in the same month, prices stood at 6.4%. In both cases, the numbers exceeded experts’ expectations.

Regarding the year-on-year figure, inflation is slightly below the December 2022 closing, when it reached 6.5%. It should be taken into consideration that, compared to the numbers from the middle of last year, this is an interesting drop. However, the authorities do not want a stagnant inflation, but one that will quickly come down to the central bank’s 2% target figure.

January’s monthly inflation was in stark contrast to December, when it rose by just 0.1%. Among the main drivers of the index were high housing, food and energy prices. Core inflation, which excludes food and volatile products, stood at 0.4% and 5.6%, respectively.

Inflation remains a problem in the US

For the financial markets, inflation in the US is one of the big problems to overcome in order to return to green numbers for stocks. Since March 2022, the Federal Reserve started raising interest rates in its crusade to lower prices. This caused the markets to cool down and the main indexes went to the floor. Stock markets in other latitudes and markets as varied as cryptocurrencies joined the fall.

Either way, Dow Jones analysts expected prices to settle at 0.4% month-over-month and 6.2% year-over-year. At the same time, these estimates expected 0.3% and 5.5% respectively for core or underlying inflation figures.

The fact that inflation is picking up again could be one of the worst pieces of news for the U.S. economy. With that comes alarm bells about a possible additional round of interest rate increases by the Federal Reserve. In that case, what can be described as a worst-case scenario, recession would be an almost inevitable event. Currently, the vast majority of analysts believe that a full-blown contraction will be reached soon.

Consequently, the fact that inflation remains fairly strong in the U.S. can only spell bad news for the economy. It is worth noting that rising inflation translates into a real decline in workers’ wages. If anything, markets would be on the verge of panic if the Fed feels it needs to increase aggressiveness.

Drivers of the CPI increase

As already highlighted, the main drivers behind the overall increase in prices were increases in the housing, food and energy sectors. To get an idea, it should be noted that the increase in housing accounted for almost half of the monthly increase. Specifically, for the month of January, prices in this sector were 0.7%. The year-on-year figures were 7.9%.

As far as energy bills are concerned, they did not lag behind in price increases. In that sense, during the month of January they grew by no less than 2%. During the last year that closed that same month, price growth was 8.7%. Likewise, food prices showed an increase of 0.5% and 10.1% on the same dates.

The average earnings of workers, in terms of wages, fell by 0.2% per hour worked in January. Year-over-year, that average was down 1.8%, according to the same Bureau of Labor Statistics report. The concern among analysts is that inflation in the U.S., which showed signs of clearly receding in recent months, now appears to be stalling and defying action. Fears of recession are being revived with greater force.

The tension lies in the fact that the Fed is implementing very strong rate hikes and many analysts fear that these could be harmful. In other words, the pace of increases in the value of money could jeopardize some key sectors of finance. That dilemma would have forced the authorities to slow the pace of rate hikes in December (0.5%) and January (0.25%).

Lowering inflation will not be easy

Analysts are aware that the situation is perilous for the U.S. economy. Jeffrey Roach of LPL Financial says going forward the task of bringing inflation down will be complex. “Inflation is coming down, but the path to lower inflation is not likely to be easy,” he told CNBC.

“The Fed will not make decisions based on a single report, but it is clear that the risks are increasing that inflation will not cool fast enough for the Fed’s liking,” the expert added.

In the cooling camp, some sectors delivered good news. Among them medical care, air travel and used cars. Recently, Fed Chairman Jerome Powell said that some “deflating” forces are at play. However, that should not be translated as a sign that they are willing to lift their foot off the accelerator.

As long as U.S. inflation is showing signs of strength, it is normal to expect the Fed to be more hawkish and stocks to continue to retreat.