Updated 10:14 am EST
U.S. inflation declined at a lower-than-expected pace last month, data from the Bureau of Labor Statistics indicated Thursday, indicating that the Federal Reserve's reluctance to declare and end to its inflation fight is supported by events in the broader economy.
The headline consumer price index for the month of January was estimated to have risen 6.4% from last year, down from the 6.5% pace recorded in December and topping the Street consensus forecast of 6.2%.
On a monthly basis, inflation was up 0.5%, the BLS said, compared to a revised 0.1% reading in December and the June peak of 1.3%. Street forecasts had projected a 0.5% acceleration.
So-called core inflation, which strips-out volatile components such as food and energy prices, rose 0.4% on the month, and 5.6% on the year, the report noted, with the annual reading topping Street forecasts.
"While there were no major surprises in today’s CPI reading, it is a reminder that while inflation has peaked it could be a while before we see it moderate to normal levels," said Mike Loewengart, head of model portfolio construction at MLorgan Stanley Global Investment Office.
"The question remains if inflation will be able to fall to the Fed’s target levels with the labor market as tight as it currently is," he added. "That could be the recipe for a soft landing, but it remains to be seen when the Fed will shift away from rate hikes and if the labor market will lose its resiliency."
On Wall Street, U.S. stocks reacted to the readings by paring earlier gains, with futures the S&P 500 last marked 21 points higher in the opening hour of trading while the Dow Jones Industrial Average gained 70 points.
Benchmark 10-year Treasury note yields were 3 basis points higher at 3.721% in volatile trading while 2-year notes were pegged 8 basis points higher at 4.581%. The U.S. dollar index, which tracks the greenback against a basket of its global peers, was marked 0.43% lower at 103.043.
The CME Group's FedWatch is now pricing in a 93.7% chance of a 25 basis point Fed rate hike on March 22, down from 90.8% last week, with the odds of a follow-on hike in May -- either 25 or 50 basis points -- pegged at around 82%.
The BLS has tweaked the way in which it calculates inflation readings, based on changes in consumption patterns since the last alteration was made in 2020. The new method will modestly raise the weight of housing costs -- a key figure in the Fed's inflation fight -- while trimming the weights of food and transportation costs.
Re-worked methods to take into account seasonal price adjustments were used in the January report and last week, the BLS said its original estimate for December inflation, a -0.1% decline, was revised to a 0.1% gain after the new seasonal adjustments were applied.
Earlier this month, Federal Reserve Chairman Jerome Powell said that the January jobs report, which showed a net increase of 517,000 new positions, "shows why it will take a significant period of time" to tame domestic inflation.
"The reality is if we continue to get strong labor market reports or higher inflation reports, it might be the case that we have to raise rates more" than is now expected," Powell said, adding that it would likely take a year to bring headline inflation back to the Fed's 2% target -- a target his said would remain firmly in place -- given what he described as 'structural' shortages in the labor market.
"The labor market report underscores the message I sent during last week’s press conference," Powell said. "There’s been an expectation that inflation will go away quickly and seamlessly, but I don’t think that’s the case. It’s going to take some time.”
