Economists Sound Alarm On Inflation's Stubborn Grip: 'No Chance Inflation Will Return To 2%' Without New Rate Hikes

The January inflation report delivered an unsettling surprise to investors Tuesday, indicating that price pressures remain more tenacious than anticipated. Despite a slight decrease from December’s 3.4% figure to 3.1% year-on-year, inflation exceeded forecasts, challenging the Federal Reserve’s pathway to anticipated rate cuts.

Hotter-than-expected inflation figures were visible in the month-over-month changes, as well as in the underlying price index.

Overall inflation saw a monthly uptick of 0.3%, surpassing both its previous increase and the anticipated 0.2%. Excluding food and energy, core inflation maintained a yearly rate of 3.9%, failing to meet the forecasted reduction to 3.7%.

Economists, analysts and market observers analyzed the implications of the data, considering its potential impact on Federal Reserve policies and future market dynamics.

Bank Of America Adjusts Rate Cut Calls

The January Consumer Price Index report reinforces the Federal Reserve’s concerns around sticky core services inflation due to a tight labor market, said Stephen Juneau, an economist at Bank of America.

The bank now views a March rate cut as highly unlikely and sees diminished prospects for a cut in May. Nonetheless, Juneau continues to anticipate rate cuts starting in June, hopeful that forthcoming CPI data will pivot the discussion back to disinflation — provided that January’s figures are seen as an outlier rather than a harbinger of a new trend.

Bank of America highlighted the dollar’s sharp reaction following the inflation report, with the USD appreciating across the board amid concurrent re-pricing of Fed expectations. On an index level, the DXY, as tracked by the Invesco DB USD Index Bullish Fund ETF UUP has moved back to its highest level in three months, having now more than fully retraced the move lower on back of the dovish December FOMC meeting.

Inflation Trends Signal No Relief Without More Fed Hikes: Schiff

Economist Peter Schiff, known for his gold advocacy, made a striking statement Tuesday regarding the inflation data: “There’s no chance inflation will return to 2% without further rate hikes by the Fed.”

He views the situation as favorable for gold, suggesting it demonstrates the Fed’s inability to curb inflation with its current interest rate strategy. “The game is over,” Schiff said.

Jeffrey Roach, chief economist at LPL Financial said Tuesday’s inflation report was not what the Fed wants to see. Services prices remain high and are not slowing as desired, he said. Investors should wait until later this month for a more comprehensive look at inflation, Roach said, maintaining a prediction for the Fed’s first rate cut in May.

Larry Tentarelli, chief technical strategist at Blue Chip Daily, said the hotter-than-expected CPI “will likely dramatically decrease the odds of a March rate cut.” Tentarelli said he expects bond yields to rise and for the market to see short-term volatility. May or June are when a first rate cut is likely to come, he said, citing strong economic indicators as a reason for the Fed’s potential delay in rate adjustments until inflation trends closer to the 2% target.

Joseph Brusuelas, chief economist at RSM US, highlights the inflation-driving role of owner’s equivalent rent, suggesting it dampens Fed enthusiasm for imminent rate cuts due to its policy sensitivity. He forecasts a significant easing ahead, but not within the first half of 2024, indicating a more prolonged timeline for addressing inflation concerns.

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