3 Experts Agree: Inflation Is Not Coming Down Fast Enough For The Federal Reserve

The Labor Department on Tuesday reported a 6.4% year-over-year increase in the consumer price index for January. Although Tuesday's print marked the fourth straight lower inflation reading, the SPDR S&P 500 ETF Trust SPY is sliding as economists fear consumer prices are not coming down fast enough for the Fed.

What Happened: The headline CPI rose 6.4% in January, down from 6.5% in December, according to data from the U.S. Bureau of Labor Statistics.

The January CPI reading came in above average economist estimates of 6.2%.

Core CPI was up 5.6% in January, above average economist estimates for a 5.5% gain, but down from 5.7% in December. 

Related Link: Inflation Continues To Cool, But At Slower Pace Than Economists Predicted: Stocks Struggle To Price In The Fed's Next Move

3 Experts On What It Means For The Fed: Although inflation is easing, Jeffrey Roach, chief economist for LPL Financial, sees a bumpy road ahead.

"The Fed will not make decisions based on just one report but clearly the risks are rising that inflation will not cool fast enough for the Fed’s liking," Roach said in response to the print.

Citing a University of Michigan benchmark survey, the LPL economist noted that long-term inflation expectations are well-anchored at 2.9%. The survey data supports the view that the Fed will raise rates by 0.25% at its next meeting in March instead of opting for a larger rate hike, Roach said.

Bill Adams, chief economist for Comerica Bank, took a similar stance following the CPI release although he emphasized that multiple rate hikes are likely ahead.

"The Fed will read this inflation report as supporting their view that further rate increases (plural) are appropriate in 2023," Adams said.

Markets are pricing in two more 0.25% rate hikes in March and May, and possibly a third 0.25% increase in June or July, he said.

"The Fed will almost certainly make another quarter percentage point rate hike at their March decision, but following decisions will depend on the data flow between now and the next scheduled meeting in May. Recent data have sent conflicting signals," Adams said.

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Sam Millette, fixed income strategist for Commonwealth Financial Network, agreed that the Fed will need to continue to raise rates.

"The January consumer price index release showed that the Federal Reserve still has work to do to tame inflation," Millette said. 

The fixed income strategist believes that Tuesday's data, combined with the strength of the labor market, indicates the central bank may have to raise rates more than the market is anticipating.

"Following the CPI release, Treasury futures markets were pricing in two additional 25 basis point rate hikes this year however as we saw last year, markets expectations can change swiftly," Millette said.

The bond market is projecting a 90.8% chance of a subsequent 0.25% hike in March and a 77.5% chance of a subsequent 0.25% hike in May, according to CME Group data.

SPY Price Action: The SPY was down 0.35% at $411.39 at the time of writing, according to Benzinga Pro.

Photo: Kurtis Garbutt from Flickr.