January inflation data shows the Fed still has work to do

January inflation higher than expected

The consumer price index (CPI) increased by 0.5% in January, coming in higher than expectations (0.4% increase) and signaling that the Federal Reserve may have more work to do to combat inflation. Core CPI and year-over-year CPI also exceeded expectations, rising by 0.4% and 6.4% respectively compared to estimated increases of 0.3% and 6.2%. Food rose by 0.7%, while energy increased by 2% after decreasing in November and December. Within the food index, the price of eggs grabbed headlines with an 8.5% increase in price. Within the energy and energy service indices, the price of gasoline increased by 2.4% and the price of electricity increased by 0.5%. Shelter led the non-core increases, rising by 0.7% in January and up 7.9% from a year ago. A number of Federal Reserve Presidents spoke last week after inflation data were released, citing the need for more rate hikes. Dallas Federal Reserve President Lorie Logan said, “We must remain prepared to continue rate increases for a longer period than previously anticipated.” Philadelphia Federal Reserve President Patrick Harker said, “In my view, we are not done yet… but we are likely close.” The market is currently expecting a 25 bps hike for the March FOMC meeting.

In other Federal Reserve news, President Biden announced that he has picked Lael Brainard, the now former Vice Chair of the Federal Reserve, to lead the National Economic Council.

The producer price index (PPI) continued the trend of beating expectations, rising by 0.7% compared to the market expectation of a 0.4% increase. The 0.7% jump marked the largest increase since June of last year. Wholesale prices excluding food, energy, and trade increased 0.6% in January, the largest increase since March. While the Producer Price Index is not monitored as closely as the Consumer Price Index, an increase in both indices shows that inflation surges are still affecting the economy.

Retail sales shatter expectations

Retail sales rose by 3% in January, far outpacing market expectations of a 1.9% increase. Food services and drinking places led all increases, jumping 7.2% from December and 25.2% from a year ago. Other categories that saw major increases included motor vehicles and parts dealers (+5.9%), furniture and home furniture stores (+4.4%), and electronics and appliance stores (+3.5%). Of the major categories, electronics and appliance stores is the only one to see a year-over-year decrease, falling by 6.3%.

Labor market update

194,000 Americans filed new claims for unemployment benefits for the week ending February 11, below market expectations of 200,000. Falling by 1,000 from the previous week, the 194,000 initial jobless claims marked the fifth straight week where initial claims totaled less than 200,000. Prior to this short streak, initial jobless claims hadn’t dipped below 200,000 since September 2022. Continuing jobless claims increased by 16,000 to total 1.696 million, slightly above market expectations.

The markets react

Treasury yields increased throughout the week, with the 2y yield ending the week at 4.619% and the 10y yield ending the week at 3.815%. Swap rates also continue to rise to their highest levels in months, leaving some corporates questioning their appetite to execute interest-rate trades. The three major equity indices remained relatively rangebound throughout the week, with the S&P 500 and Dow Jones Industrial Average finishing slightly down and the Nasdaq Composite finishing slightly up.

The week ahead

This holiday-shortened week is quieter on the economic front, highlighted by the FOMC minutes for the February 1 meeting scheduled for release on Wednesday and January personal consumption expenditures (PCE) data scheduled for release on Friday.