Sticky inflation narrative back in play

Underwhelming US price data dampens speculation of early cut in interest rates

The economic narrative around inflation and interest rates flips from week to week.

It’s typically one of two stories though. Either inflation has come down faster-than-expected, fuelling speculation of an earlier-than-expected move on interest rates. Or inflation is proving stickier-than-expected with hopes of an interest-rate cut in March or April dashed. This week it was the latter.

US headline inflation data for January, published on Tuesday, edged marginally lower to 3.1 per cent year-on-year while core inflation remained at 4 per cent as residual pricing power in the services sector lingered. The decrease was lower than expectations, dampening hopes of a March rate move by the US Federal Reserve.

The sentiment flowing from the latest US numbers was best summed up by Chris Zaccarelli, chief investment officer with Charlotte-based Independent Advisor Alliance.


“If you look under the hood, the Fed is looking at core services minus housing. That’s actually gone up. It makes you worry that inflation is going to be more sticky than we had hoped and that rates will stay higher for longer,” he said. “This puts a nail in the coffin for March and opens the possibility that May is off the table for rate cuts as well,” he said.

Market insiders closer to home said a June quarter-point cut in interest rates from the European Central Bank and the Fed “is still on the cards while the first Bank of England cut is still not priced in until August”.

The next reference point will be euro zone inflation due near the end of the month, which will either compound the latest sentiment or dilute it. But that’s no surprise. Our exit from high inflation and high interest rates was always going to bumpy rather than straightforward.