We had the January inflation report this morning. Prices rose at the hottest rate in several months, from December to January. But the year-over-year inflation number came down.
Remember, this inflation report has caused extraordinary swings in stocks for the better part of the past six months. What happened today? Nothing extraordinary.
As we discussed yesterday:
1) The headline inflation number is still high, but it doesn't reflect the current price pressures, because it's a calculation that measures the January CPI index against the very low base of January 2022. We should expect the number to be high for a few more months.
2) The Fed has already taken short term rates ABOVE the its favored inflation gauge (core PCE, which measures what consumers are actually paying for goods and services, less food and energy). This "positive real rate" dynamic (where interest rates are above inflation) has historically proven to contain inflation and produce macroeconomic stability.
3) The Fed has already built in market expectations for a few more hikes, so there was little-to-no risk of a change in that view, after seeing today's report.
Bottom line: The Fed has been THE burden on the economy for the better part of the past year. But Jerome Powell has given us plenty of signals the past two weeks, that the Fed has finished the job on the inflation fight (if not finished, then very near). Nothing in this January inflation report should alter that position.