The Message from January's US CPI... Abandon Hopes for 'Interest Rate Hike Pause'

6.4% Exceeds Expectations... Slowdown Deceleration
Fed: "Our Work Is Not Over"… Emphasis on Tightening
6-Month US Treasury Yield Surpasses 5%

[Asia Economy New York=Special Correspondent Joselgina] The warning signs of inflation in the United States, which had somewhat eased, have grown louder again with the start of the new year. The January Consumer Price Index (CPI) exceeded market expectations and even turned upward compared to the previous month. This is the result of increased upward pressure on housing and service prices, as anticipated by the Federal Reserve (Fed), the U.S. central bank. Consequently, concerns about prolonged high inflation are intensifying. Following the CPI announcement, Fed officials expressed statements such as "Our work is not yet done," reinforcing the possibility that the Fed may maintain higher interest rates for a longer period than the market had expected.

U.S. CPI Rises 6.4%...Up 0.5% Month-on-Month

According to the U.S. Department of Labor on the 14th (local time), the January CPI rose 6.4% compared to the same month last year. Although this is a slight decrease from the previous month's 6.5%, continuing a seven-month trend of slowing inflation, the pace of decline has slowed. It also significantly exceeded Wall Street's market forecast of 6.2%.

Notably, the January CPI increased by 0.5% compared to the previous month. This is a substantial rise compared to December's 0.1% and also surpassed the market expectation of 0.4%. It is the largest monthly increase since October of last year. The core CPI, which excludes the volatile energy and food sectors, rose 5.6% year-on-year and 0.4% month-on-month. The core CPI also exceeded market forecasts of 5.4% year-on-year and 0.3% month-on-month.

The main drivers of the January price increases were housing costs and various service prices, along with energy. Housing costs rose 0.7% month-on-month, accounting for nearly half of the total CPI increase for the month. Compared to the same month last year, housing costs increased by 7.9%, nearly 60% of the core CPI's year-on-year rise. Service prices such as energy services (2.1%) and transportation services (0.9%) also continued to rise. Additionally, the energy price index, which had fallen consecutively in November (-1.4%) and December (-3.1%), rebounded by 2.0% in January, further fueling inflationary pressures. Energy prices jumped 8.7% year-on-year.

[Image source=AP Yonhap News]

Fed Officials: "Our Work Is Not Yet Done"...Concerns Over Prolonged High Interest Rates

With all January CPI indicators surpassing market expectations, concerns about prolonged high inflation are spreading again. Fed officials have also stated that it is too early to halt the rate hike trend. John Williams, President of the New York Federal Reserve Bank, emphasized, "We must continue to achieve the 2% inflation target," adding, "Our work is not yet done." Thomas Barkin, President of the Richmond Federal Reserve Bank, assessed that "inflation is normalizing, but slowly."

The market is increasingly weighing the possibility that the Fed will stop the rate hike cycle later and at a higher level than expected. After the release of a strong January employment report earlier this month that far exceeded market expectations, speculation about an early end to rate hikes has weakened. With the CPI data released on this day also exceeding expectations, the Fed may judge that it needs to further tighten monetary policy. The current U.S. benchmark interest rate is 4.5?4.75%. Maria Basarou, Chief Investment Officer of Multi-Asset Solutions at Goldman Sachs Asset Management, stated, "The strength of the core CPI suggests that the Fed has a lot of work to do to bring inflation back to the 2% target," adding, "If retail sales data released the next day also show strength, the Fed may need to raise the benchmark rate to as high as 5.5% to curb inflation."

On this day, the 6-month U.S. Treasury yield in the New York bond market surpassed 5% for the first time since 2007, closing at 5.022%. Investors are betting that the benchmark interest rate will remain above 5% even in September. The 2-year U.S. Treasury yield rose to around 4.61%, and the 10-year yield also exceeded 3.75%.