The consumer price index data for January revealed that core inflation ran higher than anticipated, as service prices increased at the quickest rate since September 2022. Following the release of the CPI inflation data, the S&P 500 experienced a sharp decline in Tuesday stock market action. This caused the markets to nearly eliminate the likelihood of a one quarter-point Federal Reserve rate cut after the data was released.
The overall consumer price index rose by 0.3% on the month, which was higher than the expected 0.2% rise. The 12-month CPI inflation rate decreased to 3.1% from 3.4% in December, surpassing 3% forecasts. Additionally, the core CPI, which eliminates volatile food and energy prices, increased by 0.4% as compared to December levels, exceeding the 0.3% estimates. The annual core CPI inflation rate surprisingly remained at 3.9%, above the projected 3.7%. Core goods prices experienced a 0.3% decline on the month, which was the largest drop since July, while core services prices rose by 0.7%.
Furthermore, housing costs, including a 2.4% increase in motel and hotel rates, climbed by 0.6%. Additionally, transportation services prices increased by 1%, and prices for food away from home saw a 0.5% rise, the largest since May. Inpatient and outpatient hospital services prices jumped by 1.8%, marking the largest monthly rise since October 2015.
It is important to note that the Federal Reserve’s primary inflation rate, the core PCE price index, indicated much milder price pressures than the core CPI over the second half of 2023, at 1.9% versus 3.3% at an annual rate. Consequently, the current rule of thumb for observing CPI data suggests that monthly increases around 0.2% are positive, and 0.3% increases may still be acceptable, depending on underlying factors. A 0.4% rise might not be favorable, but may not necessarily be terrible. More information will be available on Friday.
The disparity between what is considered “not great” and “awful” may depend on what Friday’s producer price index indicates about health care prices, as this data impacts the PCE price index. According to Deutsche Bank economists, a 3.4% reduction in Medicare physician reimbursements could suppress health care inflation in January. However, there is a risk that the PPI will show a significant increase in portfolio management fees, which typically rise with stock prices but have not kept up lately.
After the release of the CPI data, the odds of a Fed rate cut were estimated at just 8.5% for March 20 and 36% by the May 1 meeting. Odds of a rate cut by June 12 currently stand at 74%, down from 92% on Monday. According to current market estimations, the Fed’s key rate is expected to end 2024 at 4.49%, up 24 basis points from 4.25% prior to Tuesday’s CPI data.
Following the CPI inflation data, the S&P 500 experienced a 1.3% drop on Tuesday. Prior to the CPI report, strong economic data and concerns among Fed policymakers about the extent of monetary policy tightness drove up Treasury yields. However, after the CPI data was released, the 10-year yield spiked 15 basis points to 4.32%.
Readers are encouraged to check IBD’s The Big Picture column after each trading day to stay informed on the prevailing stock market trend and its implications for trading decisions.
For more investment insights, refer to the following articles:
– These Are The Best 5 Stocks To Buy And Watch Now
– Join IBD Live Each Morning For Stock Tips Before The Open
– How To Make Money In Stocks In 3 Simple Steps
– The Federal Reserve Just Tightened — Stealthily
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