US consumer price growth slowed less than forecast in January

The US consumer price index rose 6.4 percent year-on-year in January, a narrower-than-expected decline.

Economists had expected annual CPI to slow to 6.2 percent from 6.5 percent in December, according to the consensus forecast released by Reuters.

Excluding energy and food prices, the “core” CPI gauge rose at an annual rate of 5.6 percent in January, also slightly below the 5.7 percent increase in the previous month. This compares to economists’ expectations of a 5.5 percent year-on-year increase.

The January inflation data has been closely watched as an important guide for investors, economists and US central bankers. An unexpectedly stronger jobs report last month fueled expectations that the Fed would need to be more aggressive in tightening monetary policy to cool the economy.

After an initial bout of volatility, stock futures and government bonds rallied. Futures for the S&P 500 rose 0.6 percent shortly after the release of the CPI data, while the US two-year Treasury yield fell 0.05 percentage point to 4.48 percent.

The Fed already raised interest rates last year from almost zero to a target corridor of between 4.5 and 4.75 percent. As inflation has eased since its peak last summer, the central bank has slowed the pace of its rate hikes, from hikes of 75 and 50 basis points in the second half of last year to 25 basis points last month.

But Fed officials have continued to stress that their fight against inflation is far from over, even as some economists and investors are predicting they could soon pause rate hikes and start cutting rates by the end of the year.

“We are still a long way from achieving price stability and I expect it will be necessary to further tighten monetary policy to bring inflation down towards our target,” Fed Governor Michelle Bowman said on Monday a gathering of community bankers in Florida.

“The continued tightness in the labor market is putting upward pressure on inflation, although some components of inflation are moderating on improvements in supply-side factors. The longer high inflation persists, the more likely households and businesses are to expect higher inflation over the long term,” Bowman said, adding, “If that were the case, the FOMC’s job of bringing down inflation would be even more difficult. ”

Continued strength in the US jobs market, coupled with a gradual decline in inflation, has raised hopes that the US economy could experience a ‘soft’ landing and avoid a recession even if monetary policy is tightened. But Fed officials have always warned that such an outcome is far from guaranteed. If inflation proves more stubborn than expected, the central bank would need to raise interest rates for an extended period to bring price pressures down to the 2 percent average target. This in turn could lead to a larger decline in production and employment in the future.

Economists and officials were particularly concerned that inflation in services has been difficult to contain, compared to inflation in goods, which has eased more quickly.