US consumer prices accelerated 0.5% in January after gaining 0.1% in December. Headline CPI increased at a 6.4% annual pace last month, which was slightly above expectations of 6.2% but a decline from December. This marked the seventh straight month of declines since the index peaked at 9.1% in June.

The shelter index, which accounts for over 44% of the CPI, is up 7.9% over the past year. While we saw declines in used-car prices and airfares last month, as long as shelter cost continue to increase rapidly it is going to be a challenge to get inflation down to the Fed’s 2.0% target.

The overall trend is inflation is easing, but it will not be a straight path to lower inflation… we expect some volatility to remain in monthly data. There was nothing in this report that would cause the Fed to change course at this point. If anything, it backs the case for the need to keep rates higher for longer. And while the Fed is not leaning on one report, the risk of inflation not cooling as soon as the Fed wants is rising.

Bonds sold off following the higher-than-expected CPI print, with the policy sensitive two-year treasury
adding 10bps to 4.62%.

CPI Revisions

On February 10th the BLS released the updated seasonally adjusted CPI data based on its annual recalculations of the adjustment factors based price movements from the prior year. Four out of the last
five months were revised higher, with an average of about 0.1% added to each of the past twelve months. While most investors don’t see significant implications for their inflation outlook based on the revised data,
it indicated the disinflation trend we saw in Q4 2022 was not as strong as we believed.