Markets and investors received two reports this week, providing insights regarding the state of inflation in January. Both reports show that inflation remains in tact and is proving harder to squash than many had hoped.

Consumer Prices

The first report highlighted consumer prices (Consumer Price Index). The consumer price index rose 0.5% in January and was up 3% from a year earlier. These changes were more than anticipated and showed increases from December (which had a monthly rise of 0.4% and annual increase of 2.9%)

A large portion of the increase was driven by food costs (including the much discussed rise in egg prices). But even core inflation (which excludes the more volatile food and energy prices) rose 0.4% in the month, after a more modest increase of 0.2% in December. The following chart shows price movements for the month.

It’s likely there are some seasonal factors at play, as well as impacts of the LA wildfires, but regardless, the latest print shows that inflation will take time to return to the Fed’s 2% target

Wholesale Prices

The second report of the week provided sightline into whole sale prices (Producer Price Index). January’s PPI showed inflation is retaining its grip on wholesale prices as well. Headline PPI rose 0.4%, above the 0.2% consensus but down from December’s 0.5%, and core, which excludes volatile food and energy, rose as expected at 0.3%, down from a revised 0.4% in December. 

Economists tend to pay close attention to the components of the PPI basket that have a direct impact on consumer prices (such as financial services, airfares, and medical services). Price increases in those categories were largely tamer than the headline index. Airline prices fell 0.3%, after a 5% rise in December. Portfolio management costs rose 0.4%. And medical services categories were mixed, with dental care prices up 1.5% in January, but physician care and hospital outpatient care services prices declining slightly.

Takeaways

Markets initial reacted negatively to the CPI report but ended the day relatively flat and rose in early trading the following day (after the PPI release). Yields also rose on the CPI report but quickly moderated. Although both reports came in stronger than anticipated, market reactions proved very muted.

While it’s hard to know the exact reason for this lack of reaction, it’s likely that it’s a matter of “reality versus expectations.” Markets have already adjusted expectations of rate cuts in 2025 (pricing in a single cut vs. multiple cuts anticipated less than a year ag) and steady inflation only confirms the likelihood of that scenario. That dynamic, combined with a strong earnings season and calm rhetoric from Fed Chairman Jerome Powell this week, was enough to allow markets to take these reports in stride. Hopefully you can do the same.

Onward we go,