Inflation slowed to 31 in January but was still higher

Inflation slowed to 3.1% in January but was still higher than expected, sending the Dow and S&P tumbling as investors all but ruled out a rate cut in March

  • U.S. inflation slowed to 3.1 percent in January, a smaller decline than expected
  • The high inflation was driven by housing and car insurance, CPI data showed
  • The S&P 500 and Dow Jones were both in the red when markets opened on Tuesday

The annual inflation rate was 3.1 percent in January – 0.2 percentage points higher than expected.

Higher-than-expected inflation could be an indication that the Federal Reserve is unlikely to cut record-high interest rates as soon as expected.

Markets on Tuesday appeared to rule out the possibility of a rate cut at the Fed's upcoming March meeting.

According to the latest CPI data from the Bureau of Labor Statistics, prices rose 0.3 percent between December and January – up from 0.2 percent the previous month.

Rent was one of the main factors driving up inflation. The shelter index rose 0.6 percent in January after rising 0.4 percent in December.

The annual inflation rate was 3.1 percent in January, down from 3.4 percent in December but still 0.2 percent higher than expected

The inflation number plays a big role in whether the Federal Reserve will cut interest rates sooner rather than later.  Pictured is its chairman Jerome Powell

The inflation number plays a big role in whether the Federal Reserve will cut interest rates sooner rather than later. Pictured is its chairman Jerome Powell

Motor vehicle insurance rose 1.4 percent for the month, but used cars and trucks saw a 3.7 percent decline between December and January.

Food costs also rose again, with the Food at Home CPI index recording its sharpest rise in a year.

A major exception was eggs, which fell by a huge 28.6 percent since January 2023.

Stock futures immediately fell following the news. The Dow Jones fell 300 points, or nearly 1 percent, and the S&P 500 fell 1.1 percent, falling below the 5,000 point mark it had risen above on Friday.

“The January inflation report was well received across the board and that has the potential to spook investors after a big rally in recent months,” said Bret Kenwell, analyst at eToro.

Economists and markets had previously expected consumer prices to rise 2.9 percent, which would have been the smallest year-on-year change in two years.

“The overall year-over-year increase was 3.1 percent, better than the 3.4 percent in December, while the core remained at 3.9 percent, not close to where the Fed wants to be,” said Mark Hamrick, senior Economics Analyst at Bankrate.

The core CPI excludes food and energy and is a metric that the Fed pays close attention to when setting interest rates.

Although vehicle insurance increased significantly compared to the previous year, the prices for used cars fell

Although vehicle insurance increased significantly compared to the previous year, the prices for used cars fell

The Food at Home CPI index rose the most in a year.  Shoppers are pictured in front of a Kroger in Dearborn, Michigan

The Food at Home CPI index rose the most in a year. Shoppers are pictured in front of a Kroger in Dearborn, Michigan

A survey by the New York Fed found that American consumers' expectations for the start of the year were for a fairly stable inflation outlook.

Several Fed officials, including Chairman Jerome Powell, said last week that they wanted to see more evidence that inflation would fall further before cutting rates.

“Attention turns to subsequent meetings in May and June,” Hamrick said.

Thursday's retail sales and Friday's producer price index (PPI) numbers are now widely expected, as are comments from Fed officials that could provide clues about future interest rates.