US CPI Quick Analysis: Inflation fights back, US Dollar set to hold up for days, but not forever


  • US inflation slowed by less than expected, hitting 3.1% YoY in January. 
  • Core CPI refused to fall, rising by 0.4% MoM and 3.9 YoY, creating a headache for the Fed.
  • The risk-off reaction in markets is set to prevail for long days.

Rosy glasses are insufficient – all the figures in January's inflation report beat estimates. While the headline Consumer Price Index (CPI( is down from 3.4% to 3.1%, economists expected 2.9%. Holding above 3% is disappointing. Underlying inflation looks even worse.

The Federal Reserve (Fed) focuses on Core CPI, which excludes energy and food prices, set on global markets. It rose by 0.4% MoM, an annualized pace of 4.8%, while YoY Core CPI advanced by 3.9%, the same as in December. Stubborn inflation is frustrating for the Fed and traders. 

Earlier this month, the US reported a whopping increase of 353,000 jobs, nearly double the expectations, and on top of upward revisions. While that data implies more consumption and, therefore, more sales for companies, the report also included a worrying report on wages. Average hourly earnings rose by a fast clip of 4.5%, indicating more inflation in the pipeline – higher rates. 

The CPI report is not weak enough to revive hopes for a rate cut in March – at least not yet – but the ongoing downtrend in inflation still keeps the US Dollar from going wild while limiting the fall stocks and Gold.

Similar to the NFP response, I expect the impact to last several days and do not foresee any immediate reversal. Nevertheless, while the data is disappointing, it is not devastating, and investors will come fresh to the Retail Sales report on Thursday, among other figures. 

The March decision is over a month away – and there is one more CPI report. Markets got a blow, the US Dollar a boost, but volatility is set to continue. 

 

(This story was corrected on February 13 at 14:23 GMT to state that US Core CPI rose by 3.9% YoY in January.)

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