Inflation rose to 3.4 percent in December – above economists’ predictions – sparking fears the Federal Reserve could stave off interest rate cuts this year.
The Consumer Price Index (CPI) was pushed up by housing which drove more than half of the monthly growth, the Department of Labor said. Food prices rose just 0.2 percent between November and December.
Overall the annual rate of inflation rose by 0.3 percent from November when it was 3.1 percent and remains well above the Fed’s 2 percent target.
Economists had predicted that the rate of annual inflation would edge up slightly to 3.2 percent at the end of the year. The above-expected increase means an expected interest rate cut in March is now unlikely, experts said.
Market reaction to the news was minimal on Thursday morning. The S&P 500 was trading flat following the release, having been up about 0.2 percent before the figures were released.
Inflation rose to 3.4 percent in December – above economists’ predictions – sparking fears the Federal Reserve could stave off interest rate hikes this year
Inflation must cool in order to pave the way for interest rate cuts this year after the Fed hiked rates to a 22-year high of between 5.25 and 5.5 percent.
The next Fed meeting is January 31 but it was widely expected that officials would vote to hold rates steady at their current level on this date.
Instead economists had put all their hopes on the following March 20 meeting. Traders had priced in a 70 percent-plus probability that the central bank will announce cut rates by 25-basis points on this date.
However experts today agreed the latest data but this plan in jeopardy.
Brian Coulton, chief economist at Fitch Ratings, told Bloomberg: ‘I think the message from this release is that core inflation is proving sticky.
‘This will give the Fed grounds for caution and they are unlikely to cut rates as quickly as the markets currently expect.’
Similarly, Greg McBridge, chief financial analyst at Bankrate, said: ‘Inflation, as measured by the CPI, is moving in the right direction but this release should squash any notion investors had of a March rate cut from the Fed.’
But many analysts urged calm on Thursday morning.
CNBC’s Jim Cramer told the station’s Squawk On the Street: ‘The reason I am not that phased because I am not in the camp that says they need to do anything in March.
‘Jay Powell said the worst thing they can do is flip flop. He has said the Fed is data dependent and, if you are, then you don’t move that fast.’