Is US inflation accelerating again? Figures suggest the Fed has further to go

US inflation seems to be accelerating again. According to the latest numbers, published today, CPI inflation across the country hit 6.4% in January, compared to the previous reading of 6.5% in December. Analysts and economists were projecting a rate of 6.2%.

What’s more, core inflation, the measure of inflation that strips out the volatile food and energy components, came in at 5.6% compared to expectations of 5.5%. The reading was 5.7% in December.

This figure suggests that inflation is becoming more embedded in the economy, and consumers, as well as businesses, are pushing up their prices to compensate for persistently higher costs.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

What the latest US inflation data means for the economy

The January inflation report was highly anticipated by the market. The US Federal Reserve has been hiking interest rates to try and bring inflation under control recently. This has sparked concern that the central bank could cause the economy to grind to a halt, as it fights to get prices lower.

“We see ourselves as having a lot of work left to do,” Fed Chair Jerome Powell said earlier this month, suggesting the central bank is going to push interest rates higher throughout the rest of the year.

While this inflation report was worse (inflation was higher) than expected, it wasn’t terrible. After all, CPI inflation is still heading in the right direction, it's just not falling as fast as some analysts and economists might have expected.

As Chris Beauchamp, chief market analyst at IG Group says, “US inflation is still resolutely sticky, and it shows the Fed still has more to do. But the numbers were broadly in line with what markets had been expecting, and were certainly not enough to frighten the horses too much.”

This is good news for investors, but there could be further disruption to come. Even though inflation is starting to moderate, with food and energy prices coming off their one-year highs, it will take some time for higher interest rates to filter through to the underlying economy.

If economic growth begins to slow dramatically, then this could spook markets. On the other hand, if the economy remains stronger than expected, it could lead the Fed to push rates even higher, and that could hurt asset prices.

“The muted reaction should not be dismissed – inflation still has the power to scare, but this was not the reading to do it. If we get another barnstormer of a jobs number then markets will go back to fretting about more sustained inflation, but for now calm reigns,” notes Beauchamp.