A better-than-expected January inflation report sparked a market rebound Friday, reinforcing optimism that easing price pressures could give the Federal Reserve more flexibility on interest rates in the months ahead.
The Consumer Price Index rose 0.2% month over month in January, below expectations for a 0.3% increase. On an annual basis, headline inflation came in at 2.4%, also under forecasts. The data immediately lifted equity markets as investors re-calibrated expectations for the path of inflation and monetary policy.
SlateStone Wealth chief market strategist Kenny Polcari explains what the CPI report means for the markets.
Former TD Ameritrade Chairman and CEO Joe Moglia told that the CPI report confirmed growing evidence that inflation is cooling at a pace supportive of economic growth. Moglia noted that a year-over-year reading near 2.4% and a softer monthly figure would be “good for us… Especially with the jobs numbers that we saw on Wednesday.”
New York Stock Exchange with American flag. (robertcicchetti / Getty Images)
Energy prices played a central role in the downside surprise. Gasoline prices declined during the month, helping offset continued increases in shelter and food costs. That energy-driven relief has become an increasingly important factor in keeping overall inflation from re-accelerating, even as certain producer-level prices remain elevated.
Moglia said that combination of moderating inflation and resilient employment could make it easier for the Federal Reserve to begin cutting rates earlier than markets currently anticipate.
“All of these… Help the Fed have reasons to wind up cutting maybe prior to what they normally would have done,” he told Maria Bartiromo.
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Moglia added that market reactions hinged heavily on how the inflation data compared with expectations.
“If it’s a good number, I think we’re going to see rally in the market,” he said, noting that the inflation reading could influence how quickly policymakers adjust rates.
Markets reacted swiftly to the data, reversing earlier losses as investors interpreted the report as evidence that inflation is moving closer to the Fed’s target without undermining economic momentum. The January CPI release now shifts attention to upcoming inflation indicators, including producer prices, for confirmation that the disinflation trend remains intact.