January’s inflation data will be a bit disappointing for markets with the Consumer Price Index (CPI) down by only 0.1% from January on the annual measure to 6.4% from 6.5%.
That’s slightly higher than expectations of 6.2%, while month on month inflation came as expected at 0.5%.
Bitcoin slightly dipped by $200 while futures have slightly turned red, presumably because a fall is still a fall and there’s a very big catch.
“The index for shelter was by far the largest contributor to the monthly all items increase, accounting for nearly half of the monthly all items increase,” the Bureau for Labor Statistics said.
This increase in shelter, or housing costs like rent, is probably primarily because of the very fast increase in interest rates to 4.75% from just 0.25% last year.
A further hike in interest rates therefore may increase further such shelter costs, making it self defeating.
That’s because interest rates are only a tool that applies to borrowers, and the biggest borrower of them all are mortgage owners.
That can includes property developers and other landlords who naturally are passing the higher mortgage costs to renters.
This inflation data therefore is significantly more nuanced than the headline would suggest, which is perhaps why the market for now seems to be treating it more as no good news rather than bad news.
Another hike of 0.25% next month is however now pretty much guaranteed with markets already pricing that in late last year when Fed’s chair Jerome Powell clarified they might have to go higher.
5% to 5.5% is what markets expect, but the more important data for now where investors are concerned is arguably not inflation or interest rates, but GDP growth.
If that continues to show a downtrend over last year, then investors might start worrying about how worse it could get.
Conversely if growth is holding up at good levels, then there might be relief as inflation continues to be in a downtrend of disinflation.