LIVE MARKETS-Lucky 13: Core CPI nudges closer to Fed inflation target

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LUCKY 13: CORE CPI NUDGES CLOSER TO FED INFLATION TARGET

Investors embarked on Friday the 13th with some lucky numbers from the Labor Department, in the form of a cooler-than-expected Consumer Price Index (CPI) USCPI=ECI.

The CPI report showed the prices urban consumers pay for a basket of goods and services grew at a decelerated pace last month.

Prices rose 0.2% on a monthly basis, versus 0.3% in December. Analysts called for that figure to hold steady.

Year-over-year, the headline figure landed at 2.4%, marking a 0.3 percentage point cooldown from December and landing 0.2 pps south of consensus.

Core CPI, which strips out volatile food and energy prices and is often referred to as "underlying inflation," cooperated with expectations by printing at 0.3% and 2.5% on monthly and annual bases, respectively.

Annual headline and core numbers are both within a half percentage point of Powell & Co's average annual 2% target, increasing the odds that the Fed could cut interest rates in the first half of the year.

"Today’s CPI print landed right where markets had positioned, and that alone brought a bit of relief," writes Karen Manna, fixed income director at Federated Hermes. "It reinforced the sense that inflation isn’t re-accelerating and that the Fed won’t need to extend its pause as long as the more hawkish voices feared."

"Paired with the recent jobs data—where revisions told the real story—this report keeps the narrative intact: rate cuts move a little closer into view, even if they’re still not ‘near.’"

Line-by-line, a 1.5% drop in energy prices put the brakes on gasoline prices, which fell 3.2%.

The cost of an airline ticket was the outlier, surging by 6.5% in one month.

Food prices, up 0.2% last month, have risen by 2.9% from January 2025.

The cost of shelter and services, two metrics closely watched by the Fed, rose 0.2% and 0.4%, respectively. Shelter and services show year-over-year growth of 3.0% and 3.2%, continuing to coast well above the underlying measures.

"For low- and middle-income households, the one-two punch of elevated inflation for food and shelter can’t be overlooked," says Jim Baird, chief investment officer at Plante Moran Financial Advisors. "Spending on food and shelter represents a significant portion of monthly budgets for low-income households; surging prices for both have had a disproportionately large impact for those consumers in particular."

Finally, it's been a minute since we dropped in on our old friend the Misery Index, which for our purposes adds the annual CPI price growth to the unemployment rate.

It's a measure that has been loitering in the neighborhood of 7% for coming up on three years now, having essentially settled back into the pre-pandemic normal.

(Stephen Culp)

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