'US January CPI Rises Again Above 3% Due to Housing Costs... Interest Rate Cut Forecast Delayed to June (Update)'

Core CPI increase rate also 3.9%... Exceeds expectations
Pivot forecast timing shifts from May to June

The US Consumer Price Index (CPI) inflation rate for January this year exceeded market expectations, remaining in the 3% range. Rising housing costs and food prices were the main drag factors. Expectations for the Federal Reserve's (Fed) first interest rate cut have been pushed back to after June.

On the 13th (local time), the US Department of Labor announced that the January CPI rose 3.1% year-on-year. This surpassed the expert forecasts of 2.9% compiled by Bloomberg News and The Wall Street Journal (WSJ). Month-on-month, it also increased by 0.3%, exceeding the expected 0.2%.

The core CPI, one of the indicators closely watched by the Fed, rose 3.9% year-on-year and 0.4% month-on-month. This also exceeded market expectations of 3.7% and 0.3%, respectively. Notably, the 0.4% month-on-month increase in core CPI was the largest rise in eight months since May last year. The core CPI excludes volatile energy and food prices to show the underlying trend of inflation.

Rising housing costs, food prices, auto insurance, and medical expenses pushed the CPI higher. Housing costs, which account for 35% of the CPI weighting, rose 0.6% month-on-month and 6% year-on-year. Two-thirds of the January CPI increase was due to housing costs. Service prices also rose 0.7% month-on-month and 5.4% year-on-year amid housing cost increases. Food prices jumped 0.4% month-on-month and 2.6% year-on-year. Medical expenses increased 0.7% and 0.6% month-on-month and year-on-year, respectively. However, energy prices fell 0.9% month-on-month and 4.6% year-on-year, limiting the overall CPI rise.

Initially, the market expected the January CPI inflation rate to fall into the 2% range for the first time in two years and ten months since March 2021. However, with the January CPI surpassing market expectations, prospects for a rate cut in May have dimmed. Fed Chair Jerome Powell has repeatedly emphasized after the January Federal Open Market Committee (FOMC) meeting that he wants to see more evidence that inflation is steadily declining toward the Fed's 2% target. While the Fed focuses most on the Personal Consumption Expenditures (PCE) price index, which has a lower housing cost weight and is considered the core of inflation in the service sector, the recent CPI inflation trend is also expected to be factored into future monetary policy decisions.

The market's expected timing for the Fed's rate cut has shifted from May to June. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market currently prices about a 38% chance that the Fed will cut rates by at least 0.25 percentage points at the May FOMC meeting. This is a significant drop from over 60% the day before. The probability of the Fed making its first rate cut in June has risen from the low 40% range the previous day to the mid-50% range.

Derek Tang, a monetary policy analyst at LH Meyer, said regarding the rate cut timing outlook, "The tendency to skip March has strengthened, and now there is a temptation to push the cut timing to June." He added, "Since Chair Powell mentioned that the inflation path will be challenging, officials would not be surprised by one more rate hike, but the data today does not help alleviate their concerns about inflation rising above the target."

Anna Wong, an economist at Bloomberg Economics (BE), Bloomberg's economic research institute, said, "The January CPI report shows that the path to returning inflation to 2% is not smooth," adding, "Our base scenario is that the Fed will start cutting rates in May." Having maintained a March pivot outlook after the January FOMC, she added, "If the warning signs revealed in this report persist, the risk of a later cut timing increases."

Concerns about a delayed pivot (monetary policy direction change) have led all three major indices on the New York Stock Exchange to decline. As of 10:57 a.m. that day, the Dow Jones Industrial Average was down 1.26% from the previous trading day. The large-cap-focused S&P 500 and tech-heavy Nasdaq indices were down 1.21% and 1.28%, respectively.

Government bond yields are rising. The US 10-year Treasury yield, a global benchmark for bond yields, traded at around 4.28%, up 11 basis points (bp; 1 bp = 0.01 percentage points) from the previous trading day. The 2-year US Treasury yield rose 13 bp to around 4.6%.