Fedwatchers in the United States are calling off bets that the Federal Reserve, the US central bank, will start cutting its policy rates at its meeting scheduled for April 30 to May 1 after inflation data released on Tuesday show consumer prices rose at a slightly stronger pace in January compared to December.

Tuesday’s report from the Labor Department showed prices rose 0.3 per cent in January, the largest increase in prices for a single month since October. In December, prices rose 0.2 per cent. Compared with a year ago, prices are up 3.1 per cent. That is less than the 3.4 per cent figure in December and far below the 9.1 per cent inflation peak in mid-2022. But the latest reading is still well above the Federal Reserve’s 2 per cent target level.

“Today’s data is not what markets or the Fed would have liked to see, but it’s important not to overreact and jump to the assumption that an inflationary resurgence is developing,” said Seema Shah, chief global strategist at Principal Asset Management, in a quote carried by
Reuters, a news agency. “A March cut is completely off the agenda, but May could still be in play if economic activity plays ball and finally starts to show the impact from prior Fed tightening,” Shah continued.

Excluding volatile food and energy costs, so-called core prices climbed 0.4 per cent last month, up from 0.3 per cent in December. On a year-over-year basis, core prices were up 3.9 per cent in January, the same as in December. Core inflation is watched especially closely because it typically provides a better read of where inflation is likely headed.

The news caused financial markets to push back their interest rate cut expectations to June from in May. Policymakers have said they are in no hurry to start lowering borrowing costs and want convincing evidence that inflation is on a sustained slow path. Since March 2022, the US central bank has raised its policy rate by 525 basis points to the current 5.25 per cent to 5.50 per cent range.

A rate cut by the central bank typically lowers the costs of mortgages, auto loans, credit cards and other consumer and business borrowing, and could bolster the economy. But a much stronger economy could also pose a challenge for the Fed because faster growth can accelerate wages and consumer spending. If businesses aren’t able to keep up with greater customer demand, they typically respond by raising prices, which would worsen inflation.

In the final three months of last year, the economy grew at an unexpectedly rapid 3.3 per cent annual rate. There are signs that growth remains healthy so far in 2024. Businesses engaged in a burst of hiring last month. Surveys of manufacturing companies found that new orders rose in January. And services companies reported an uptick in sales, according to an Associated Press report.