Investing.com - U.S. consumer prices rose by more than expected in January, pointing to lingering inflationary pressures that could bolster the case for the Federal Reserve to carefully approach future potential interest rate reductions.
Headline consumer prices increased by 3.0% in the twelve months to January, above expectations that the reading would match December’s pace of 2.9%, according to Labor Department data on Wednesday. Month-on-month, the gauge unexpectedly accelerated to 0.5%, up from 0.4% in the prior month and faster than economists’ expectations of 0.3%.
The so-called core measure, which strips out volatile items like food and fuel, rose by 3.3% year-over-year, compared to 3.2% in December and estimates of 3.1%. The monthly metric ticked up by 0.4%, versus 0.2% in the previous month and projections of 0.3%.
The numbers are the latest indication that a recent slowdown in price gains has stalled at a level above the Fed’s stated 2% target. U.S. stock futures sank following the inflation report, while the rate-sensitive 2-year U.S. Treasury yield and benchmark 10-year yield moved higher. Yields typically move inversely to prices.
This week, Fed Chair Jerome Powell told a Congressional committee in a testimony that stubborn above-goal inflation contributed to policymakers’ decision in January to push pause on a series of rate cuts that stretched back into 2024 and signal a wait-and-see attitude to further borrowing cost drawdowns.
Powell added that the American economy overall is "strong," highlighting in particular a jobless rate of 4% that is roughly around the level considered to indicate full employment.
"We know that reducing policy restraint too fast or too much could hinder progress on inflation," Powell said, echoing comments he made after the Fed kept interest rates steady at a range of 4.25% to 4.5% last month.
Still, Fed officials have flagged worries around the impact of U.S. President Donald Trump’s new tariff policies. Some economists have argued that the changes, which have so far included levies on goods incoming from China as well as on steel and aluminum imports, could refuel inflation -- and, by extension, push out the timeline for possible rate cuts. Powell declined to comment specifically on the actions in his testimony.
"[T]he release is [undoubtedly] hot and clearly negative, although it could cause the White House to temper some of its tariff plans as Trump seeks to calm markets and arrest ongoing concern about inflation and the cost of living," analysts at Vital Knowledge said, adding that this was the "bull case" interpretation of the inflation data.
More bearish sentiment would likely see that the figures will "push rates up and shift Fed expectations in a hawkish direction," the analysts said, adding that "markets will be lucky for just a single 25-basis point reduction this year."
In a note to clients on Monday, analysts at BofA said Trump’s policy objectives would be "mildly inflationary." Price growth stemming from the tariffs is likely to be play out in the second half of this year, they predicted, although the imposition of new levies in the next few weeks "could advance the timeline."
"A key question is whether policy changes impact long-run inflation expectations," the analysts said.
Last week, a survey from the University of Michigan found that U.S. households expect inflation to accelerate to 4.3% over the next year -- the fastest level of the reading since November 2023. Over the upcoming five years, inflation is estimated to run at 3.3%, the highest since June 2008. Meanwhile, consumer sentiment slumped to a seven-month low.