Inflation Cooled in January, but Analysts Fear a Plateau

While inflation eased slightly in January, Tuesday’s Consumer Price Index print still came in higher than expected. The pace of higher prices cooling may be starting to plateau, analysts fear. 

The CPI rose 0.5% in January, coming in 6.4% higher than a year ago. Economists had expected a 6.2% year-over-year increase. 

Shelter costs accounted for about half of the month-over-month increase. Food and energy prices came in 10.1% higher and 8.7% higher year over year. 

However, even a slight decline in the historically high inflation Americans have experienced for roughly 18 months is a cautiously positive sign, Noelle Acheson, editor of Crypto is Macro Now and former head of market insights at Genesis, said in a note Tuesday. 

“We should see greater confidence in the soft landing narrative, renewed conviction that there could be rate cuts this year, and the return of more risk-on sentiment,” Acheson wrote. “Even this would be a temporary narrative, however.”

Federal Reserve Chair Jerome Powell has maintained that future rate decisions are going to be data-dependent, but he expressed confidence in sustained cooling prices in comments earlier this month. 

“The disinflationary process, the process of getting inflation down, has begun,” Powell said during an appearance at the Economic Club in Washington, D.C. last week. 

The central bank is watching for a cooling labor market and slower-paced inflation, Powell reiterated in Washington, D.C. 

“The reality is we’re going to react to the data,” Powell said. “So if we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than is priced in.”

Markets were mixed after the release of Tuesday’s print, which hit before the start of the trading session. Dow Jones futures were relatively flat while the Nasdaq Composite index initially spiked up before turning sharply lower, down about -0.5% at the opening bell in New York. 

Crypto markets initially edged lower to match, with bitcoin (BTC) losing around -0.7% and ether (ETH) off a fraction. 

But by 10:00 am ET, bitcoin saw a sharp reversal to the upside, in an impulsive move higher by more than 2%.

December’s CPI reading showed a 7.1% year-over-year increase, coming in cooler than analysts had expected. 

The New York Fed’s recession model is now calling for a 57% probability of a recession, even higher than the central bank branch predicted ahead of the 2008 recession. The model is based on the difference between 3-month and 10-year Treasury yields, and the model’s track record is perfect once it goes above 50% probability.