Breaking down the January CPI report: Will the Fed increase interest rates again?

The January inflation report found that inflation has continued to cool in the United States, marking a seventh consecutive month in which the rate of price increases had fallen nationally.

The consumer price index (CPI) data published on Tuesday recorded an annualised inflation rate of 6.4% in January. This was a slight decrease in the year-on-year figure, despite prices climbing by 0.4% in the Core CPI figures.

Inflation no longer poses the same economic threat that it did at points in 2022, but the CPI report does show that the US is still some way from the 2% target laid down by the Federal Reserve. With that in mind, the Fed may opt to increase interest rates once again.

What has the Federal Reserve said about interest rates?

Last week Jerome Powell, chair of the Federal Reserve, held a press conference at Washington DC’s Economic Club to discuss the central bank’s position on inflation. During the appearance he made clear that, while the country is in “the very early stages of disinflation”, more progress needs to be made before the Fed can ease interest rate measures.

“There has been an expectation that it will go away quickly and painlessly — and I don’t think that’s at all guaranteed; that’s not the base case,” Powell said.

“The base case for me is that it will take some time, and we’ll have to do more rate increases, and then we’ll have to look around and see whether we’ve done enough.”

Last week the January jobs report was published to much acclaim from the Biden administration. The economy had far exceeded expectations, adding more than 500,000 new jobs last month.

The Federal Reserve was more cautious of the strong growth figures and warned that such rapid job creation suggests that the economy is still running hot. Interest rate hikes, used to discourage borrowing and cool the economy, are expected to continue while inflation remains high.

More interest rate increases are coming

The figure of 6.4% announced on Tuesday may seem a little theoretical and difficult to quantify in day-to-day life. While some growth is necessary to keep the economy moving, a rate of 6.4% is considered dangerously high and well above the Fed’s own target.

The US central bank aims to keep annualised price rises at around 2%; enough to keep new investment flowing without pushing up prices too quickly. While the US remains well above that 2% target it is fair to assume that interest rates could be upped once again to cool the economy.

On Monday, the day before the January inflation report was released, Fed Governor Michelle Bowman told an American Bankers Association conference that more increases would likely be coming.

“I expect we’ll continue to increase the federal funds rate because we have to bring inflation back down to our 2% goal. And in order to do that we need to bring demand and supply into better balance,” she said.

Benchmark lending rates from the Fed are currently in the 4.50-4.75% range, the highest seen since 2007.