The Labor Department reported this morning that consumer prices rose 0.4% last month. This was a bit of a surprise since Wall Street was only expecting a 0.3% increase.
As anyone who's been to a supermarket recently can tell you, one of the trouble spots has been food inflation which rose 0.7% in January. The "core rate" of inflation, which excludes food and energy, rose 0.3% which was also 0.1% above Wall Street's estimate.
On a year-over-year basis, the CPI is up 4.3% in January. Core inflation is up 2.5% over the same period, the fastest pace since February 2007.Fed officials won't like the CPI report, but it probably won't be enough to slow down additional rate cuts in coming months. The Fed is worried that financial market turmoil will create a credit crunch that could push the economy into a prolonged downturn.
Economists expect the Fed to choose to cut interest rates by a half-a-percentage point at their next meeting on March 18.
Fed officials have recently begun to emphasize headline inflation after years of just focusing on core prices.
In a separate report Wednesday, the Commerce Department said housing starts rose 0.8% in January to a seasonally adjusted annual rate of 1.01 million units. Building permits fell 3.0%.
With the headline CPI rising 0.4%, inflation-adjusted, or real, average weekly earnings fell 0.5% in January.
Frankly, this was not the best CPI report. I think it will bring up a lot of "stagflation" talk. My view is that in the worst case scenario, the Fed only cuts by 25 basis points on March 18. It will all rest on the payroll report and the unemployment rate.
