US inflation rate falls to 3.1 percent at the beginning of the year

As of: February 13, 2024 3:47 p.m

Price inflation in the USA weakened further at the beginning of the new year – but not as significantly as expected. The monetary policy reversal could be a long time coming.

Inflation in the US fell at the beginning of the year. Consumer prices rose 3.1 percent in January compared to the same month last year, the Labor Department announced today in Washington. In December the inflation rate was 3.4 percent.

However, price inflation did not weaken as significantly as expected. Analysts had expected a rate of 2.9 percent on average. From December to January, prices rose by 0.3 percent. The experts had also expected lower growth on a monthly basis.

Two percent inflation as a goal

The numbers are important for the monetary policy of the world’s most important central bank – the US Federal Reserve. It wants to sustainably control the inflation rate towards its target value of 2.0 percent. According to Fed Chairman Jerome Powell, it has made progress, but wants to see more “good data” pointing in this direction on the way to a turnaround in interest rates.

In recent months, the monetary authorities have kept key interest rates stable. Significant interest rate cuts have been expected on the financial markets for some time this year. According to the CME Group’s Fed Watch Tool, a slight majority of market participants recently expected an initial cut at the Fed meeting in May. But other central bankers had also recently dampened these speculations with reference to the uncertain development of inflation.

High cost of housing

The so-called core inflation rate in the USA was 3.9 percent year-on-year in January and 0.4 percent month-on-month – and was also above market expectations. According to experts, it reflects the general price trend better than the overall rate because components that are prone to fluctuations such as energy and food are excluded.

“The cost of housing is responsible for the fact that the inflation data at the start of the year presented an unpleasant surprise,” commented LBBW analyst Elmar Völker. Since October 2023, the trend towards easing on the inflation front has almost come to a standstill.

Economist Bastian Hepperle from Hauck Aufhäuser Lamp Privatbank sees it similarly: “The decline in inflation remains sluggish and requires a lot of patience from the Fed. However, from April onwards, the inflation rate is likely to creep towards the two percent target value.”

“No reason for rapid interest rate cuts”

NordLB analyst Tobias Basse said: “The current figures on US consumer prices do not give the Fed any reason to cut interest rates quickly.” Given the high level of uncertainty about economic developments in the USA, he currently expects the central bank to adopt a wait-and-see strategy. “Only more clarity about future macroeconomic trends should enable the central bank to cut key interest rates in the future.”

The unexpectedly high US consumer prices had a noticeable impact on the German stock market this afternoon. The DAX, which had already slipped below the 17,000 point mark at the start of trading, lost up to one percent to 16,871 points after the publication.

Yields on ten-year US Treasuries, on the other hand, turned positive and rose to up to 4.297 percent from 4.170 percent the previous day. There was also a strong boost for the dollar: The dollar index rose by 0.6 percent to 104.81 points because market participants revised their bets on quick interest rate cuts by the US Federal Reserve in view of the slower decline in inflation.

Capital markets strategist Jürgen Molnar of Robomarkets had previously warned that the inflation data could move the market significantly as it is a crucial factor in the Fed’s monetary policy direction.

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