What’s going on here?
US inflation crept up in January, with headline figures showing a 0.5% monthly and 3.0% annual rise. Core inflation wasn't far behind, climbing by 0.4% monthly and 3.3% year over year, as vehicle and service costs added pressure.
US inflation picked up sharply in January, with services especially strong. Source: Haver, abrdn.
What does this mean?
The latest inflation figures offer a conflicting picture for the Federal Reserve: the rise in core inflation suggests persistent price rises, but the shelter component's modest growth, with rents increasing by just 0.3%, could point to an easing in housing pressures, possibly thanks to a larger housing supply.
Core services excluding shelter, however, present ongoing inflationary challenges, showing more than a 5% increase annually. That divergence complicates the Fed's task.
Why should I care?
For markets: Inflation leaves markets in suspense.
Chair Jay Powell remains cautious, hinting that the fight against inflation is not over. The Fed's decision to hold interest rates reflects a wait-and-see approach, with potential cuts dependent on falling inflation. Investors, therefore, are closely tracking inflation data, with the mixed signals creating volatility. The housing sector's potential reprieve might lift real estate stocks, while sustained service sector costs pressure consumer-focused sectors.
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Carl Hazeley
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