Implications:   The embers of inflation continue to glow, and in January they burned hotter.  Don’t expect another rate cut from the Federal Reserve anytime soon.  Consumer prices jumped 0.5% for the month (+5.7% annualized) and came in well above consensus expectations, with the twelve-month reading at 3.0%, barely below the 3.1% inflation in the year ending January 2024.  Looking at the details, the pick-up in inflation was broad-based, with energy rising 1.1% and food up 0.4%.  But it’s important to note that these two often-volatile categories have not been what’s kept inflation from returning back to the Fed’s 2.0% target.  “Core” prices, which strip out food and energy, rose 0.4% in January (also above consensuses expectations) with the twelve-month reading increasing to 3.3%, which is above headline inflation.  Yes, the main driver of core inflation has been housing rents, which continue to run hot (+0.3% in January), though not as rapidly as in the years prior.  Some analysts – including those at the Fed – have argued that housing rents have artificially boosted inflation due to the way it’s measured.  But a subset category of prices that Fed Chair Jerome Powell said back in November 2022, “may be the most important category for understanding the future evolution of core inflation” – known as the “Supercore” (which excludes food, energy, other goods, and housing rents) – surged 0.8% in January, the fastest monthly increase in a year.  The increase was led by higher prices for used vehicles (2.2%), motor vehicle insurance (+2.0%), and hotels (+1.7%).  If the Fed still looks at this measure (they never seem to mention it anymore) then they would not be happy to see these prices up 4.1% in the last year.  No matter which way you cut it, inflation is still running above the Fed’s 2.0% target, and it is no longer improving.  And yet, the Fed has cut rates a total of 100bps since September.  Moving forward, we expect the Fed to remain on hold until inflation renews its long and winding march toward 2.0%, or the economy slows substantially.

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