Is US inflation accelerating again? Figures suggest the Fed has further to go

The latest US inflation figures suggest inflation is not falling as fast as analysts had predicted. It could even be speeding up again.

The US Federal Reserve
(Image credit: © Getty Images)

US inflation seems to be accelerating again. According to the latest numbers, published today, CPI inflation across the country hit 6.4% in January, compared to the previous reading of 6.5% in December. Analysts and economists were projecting a rate of 6.2%.

What’s more, core inflation, the measure of inflation that strips out the volatile food and energy components, came in at 5.6% compared to expectations of 5.5%. The reading was 5.7% in December.

This figure suggests that inflation is becoming more embedded in the economy, and consumers, as well as businesses, are pushing up their prices to compensate for persistently higher costs.

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What the latest US inflation data means for the economy

The January inflation report was highly anticipated by the market. The US Federal Reserve has been hiking interest rates to try and bring inflation under control recently. This has sparked concern that the central bank could cause the economy to grind to a halt, as it fights to get prices lower.

“We see ourselves as having a lot of work left to do,” Fed Chair Jerome Powell said earlier this month, suggesting the central bank is going to push interest rates higher throughout the rest of the year.

While this inflation report was worse (inflation was higher) than expected, it wasn’t terrible. After all, CPI inflation is still heading in the right direction, it's just not falling as fast as some analysts and economists might have expected.

As Chris Beauchamp, chief market analyst at IG Group says, “US inflation is still resolutely sticky, and it shows the Fed still has more to do. But the numbers were broadly in line with what markets had been expecting, and were certainly not enough to frighten the horses too much.”

This is good news for investors, but there could be further disruption to come. Even though inflation is starting to moderate, with food and energy prices coming off their one-year highs, it will take some time for higher interest rates to filter through to the underlying economy.

If economic growth begins to slow dramatically, then this could spook markets. On the other hand, if the economy remains stronger than expected, it could lead the Fed to push rates even higher, and that could hurt asset prices.

“The muted reaction should not be dismissed – inflation still has the power to scare, but this was not the reading to do it. If we get another barnstormer of a jobs number then markets will go back to fretting about more sustained inflation, but for now calm reigns,” notes Beauchamp.

Rupert Hargreaves

Rupert was the former Deputy Digital Editor of MoneyWeek. He's an active investor and has always been fascinated by the world of business and investing. 

His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks. 

Rupert has freelanced as a financial journalist for 10 years, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them. 

He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service. 

He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.