US CPI Analysis: Sticky inflation? What is sticky is the downtrend, stocks to rally, USD to fall

Is that it? Some investors surely have these thoughts, as they brush aside minor beats on yearly inflation figures – while they see the trend as remaining to the downside. That implies a risk-on mood in markets. 

The most important figure is the Core Consumer Price Index (Core CPI), which rose by 0.4% MoM in January, exactly as expected. While this is a tick-up from 0.3% in December, it remains below the high 0.6% levels seen in mid-2022. Yearly underlying inflation is up 5.6%, higher than expected but below the figure recorded in December. 

The same yearly picture is seen for headline CPI, which slowed from 6.5% to 6.4% but came out above the 6.2% projected. Inflation is hotter than expected but trending down. That is good news for the US economy – and for stocks. 

I also want to emphasize that the housing sector still contributes to higher inflation despite falling rent prices. This is due to a quirk in calculations, well known to economists at the Federal Reserve (Fed). The cooling housing sector will take a few more months to reach the data. 

Inflation is falling despite the rent factor – and has more room to fall without it. 

Perhaps the strongest argument to expect optimism in markets stems from the "super core" inflation – a calculation of the "non-shelter core services" factors. These exclude energy, food, rental, and other volatile factors, going beyond the basic core exclusions of food and fuel. This super-core is up only 0.27% in January, down from roughly 0.40% in December. 

Inflation is falling – and everybody is noticing it. 

The Fed is still set to raise rates in March, and the labor market is on fire. Nevertheless, even if employment is steaming hot, inflation is cooling. That is good news for the US economy, the world and stock markets. For the US Dollar, it means ongoing pressure.