Who’s Afraid of a January Price Quirk? Traders

Interest-rate cuts are still in the offing in the US, but you might not think so with the way bonds are selling off after Tuesday’s inflation report. The latest consumer price index reading indicated that core prices — excluding volatile food and energy — rose 0.4% in January from a month earlier, exceeding the median economist forecast. Yields on 10-year notes hit the highest level since November.

The report was very poorly timed. It comes not long after Federal Reserve Chair Jerome Powell said he needed to see more evidence of disinflation to start reducing policy rates, and Tuesday’s report sure didn’t look — at least on the surface — like the sort of evidence required. In reality, there’s a chance that the “January effect” and quirky housing statistics drove most of the miss. There’s still plenty of time for the data to evolve in a manner that makes the Fed comfortable cutting in May.

Core Services Inflation Is Back

Let’s start with the excess seasonality.

There’s reason to believe that companies occasionally use the start of the year to raise prices. Just as we do in our personal lives, many business owners have been taking stock of the year that was. They’re looking back at 2023 — and the inflation experience of the past three years — and wondering if they can expand profit margins that may have narrowed due to wage and other cost pressures. Clearly, they’re aware that inflation is ebbing, but they may have decided to try to pass through one last price increase.

Goldman Sachs Group Inc. — one of the few firms to correctly forecast the 0.4% increase in core prices — called this the “January effect” in a note on Monday. Here’s an excerpt from the note from Manuel Abecasis and Spencer Hill: