US CPI rises higher than expected in January, how will the Fed react?

Earlier today, the latest US CPI data was released, showing inflation in the US much sharper than market and analyst expectations. Headline inflation fell to 3.1% from 3.4%, however this was less than the 2.9% anticipated by economists. Core CPI, meanwhile, which excludes food and energy prices, rose by 0.4% to 3.9% .

What effect will today’s data have on the Fed’s decision-making going forward? Senior Portfolio Manager Michele Morra shares his insight.

“Stronger than anticipated CPI is a material blow to investors pricing in a spring rate cut “

“US CPI has come out much stronger than expected, in a material blow to investors anticipating a spring rate cut. Core consumer prices rose to 3.9% against an estimate of 3.7%, while headline inflation dropped at 3.1% against an expectation of 2.9%. The rise in the core CPI will be a headache for the Fed, particularly as the data showed a monthly rise of 0.4% (for core CPI), which amounts to the biggest rise since May 2023,” Michele Morra, Senior Portfolio Manager at Moneyfarm, commented to media.

We can expect the Fed to emphasise the need for prudence and data dependent decision making to determine the appropriate timing and magnitude of any future policy moves. This approach would reflect a balance between the need to address disinflationary pressures while also ensuring that policy actions are well-calibrated to support the Fed’s dual mandate of maximum employment and stable prices.”

Michele Morra: Michele is a Senior Portfolio Manager and Head of ESG Investing at Moneyfarm. Member of the Investment Committee since 2018, he teaches the ESG Investing seminar at the University of Milan Bicocca. Michele gained extensive experience in quantitative finance and financial risk management as a derivatives specialist at PricewaterhouseCoopers, where he worked with corporations and large investment banks. Michele obtained an MSc in Quantitative Finance from the University of Milan Bicocca and an MSc in Data Analytics from Queen Mary University of London, with a dissertation in derivatives pricing and deep learning. Michele is a CFA in ESG investing as well as a GARP Sustainability and Climate Risk certificate holder.