Still Sticky

It’s not going away.

Inflation picked up for a fourth straight month in January amid another rise in in food and energy costs.

Consumer prices overall increased 3% from a year earlier, up from 2.9% in December. That's the most since June and above the 2.9% expected.

Inflation seemed to be coming under control as it peaked at 9.1% in June 2022 and had been coming down steadily. The trend from March 2024 to September 2024 showed a drop from 3.5% to 2.4%. That trend was heading toward the Fed’s goal of 2.0% inflation.

The trend reversed suddenly in October 2024 when inflation rose to 2.6%. It then rose further in November 2024, hitting 2.7%. Then it rose again to 2.9% in December, the highest rate since last July. Then again in January. In short, the narrative that inflation is coming under control just exploded in the Fed’s face.

Here’s the tale of the inflation tape using the Consumer Price Index on a year-over-year basis:

Markets are reacting negatively today so far as the Dow is down over 400 points. The 10-year Treasury yield is up. The increase in inflation over the past five months may indeed prove transitory, but there can be no assurance of that as of now. But the Fed can’t take that chance. Unemployment is “normalizing” around 4.0% in the Fed’s view, so inflation is the problem at hand. What is concerning is the upward trend is continuing.

The next Fed meeting is March 19. The Fed’s policy move at that meeting will be a close call. The Fed is likely to stand pat in view of the increasing inflation metrics. Powell said in his last press conference that the Fed is in no hurry to lower rates. That is not music to President Trump’s ears.

Other inflation and employment reports will be released in early March before the March 19 meeting. This kind of data dependence is revealing because it shows the Fed is following markets and not leading them. That’s bad news for investors because if the Fed were leading the economy, they would get ahead of the coming recession. They’re not and markets will suffer.