US consumer prices rose more than expected in January, according to the latest data from the Bureau of Labor Statistics released Tuesday morning.
Investors had been closely watching the print for clues on when the Federal Reserve will begin cutting interest rates. Markets are now pricing in a nearly 80% chance the Fed cuts rates in June, bucking previous expectations that the central bank would begin cutting rates in May.
“This was a bad report for those betting the Fed is going to start decreasing interest rates soon,” Eugenio Aleman, chief economist at Raymond James, wrote in reaction to the hotter-than-expected print.
Ellen Zentner, chief US economist at Morgan Stanley, added: “The acceleration in core PCE is aligned with our view of a bumpy path ahead. We think that sequential prints in the first quarter of 2024 will be overall higher than what we have seen in the last 6 months. This acceleration will be one factor delaying the decision to start cutting rates to June this year.”
Citi, meanwhile, warned that the hot inflation print will likely have an impact on the recent stock market rally.
“Strong core CPI is not a game changer but likely to drive a short-term pullback,” Stuart Kaiser, head of Citi’s US equity trading strategy, wrote. “With strong growth data in the background, it will be hard for the Fed to cut as early as some investors hoped and raise market concerns about an overheating type scenario despite very restrictive policy.”
“We should get a pullback here, maybe in the 2-4% type range, but that is somewhat limited by the fact that the economy is still quite strong,” he continued.
Stocks tumbled in early trading following the report while the yield on the 10-year Treasury note (^TNX) ticked about 10 basis points higher to trade near 4.3%.