【MACRO Alert】 U.S. housing costs have become a driver of inflation data, and the market has reacted

The increase in U.S. inflation last month exceeded expectations across the board, supporting the Federal Reserve's cautious attitude towards rate cuts. Data released by the U.S. Bureau of Labor Statistics on Wednesday showed that the core CPI, which excludes food and energy costs, accelerated to 0.4% month-on-month in January, the largest increase since March 2024, exceeding expectations of 0.3% and the previous value of 0.2%; the year-on-year growth rate accelerated to 3.3%, higher than the expected 3.1% and the previous value of 3.2%. The overall CPI accelerated to 0.5% month-on-month, the largest increase since June 2024, higher than the expected 0.3% and the previous value of 0.4%, and the year-on-year growth rate returned to the “three-digit” at 3%, higher than the previous value and market expectations of 2.9%.

Last fall, the Federal Reserve began to cut interest rates from a 23-year high, and some experts were even ready to declare the Fed a victory in the fight against historic inflation. However, since the Fed's first rate cut in September last year, the U.S. government's two main inflation measures - CPI and PCE inflation - have remained stubbornly above 2%. Housing inflation measures the valuation of rents when homeowners live in their homes. The two indicators measure inflation for owned and rented homes in the United States, respectively, and together account for more than 33% of the total weight of the CPI.

If housing inflation remains high, overall inflation will also remain high. “Proportionately, housing accounts for a large portion of the CPI market basket,” said Erica Groshen, former director of the Bureau of Labor Statistics. “And it does move more sluggishly, there's no doubt about that.” In contrast, housing has a smaller weight in the Fed's preferred inflation measure, PCE, accounting for less than 20%.

Despite the Federal Reserve's rate cuts, mortgage rates remain high, weakening homebuyers' ability to pay. Fannie Mae data showed that the average rate for a 30-year fixed mortgage in the United States was 6.89% last week, which was slightly lower than 7.04% in January, but still higher than the average level in the 14 years before 2022. However, prices in the rental market have shown signs of stabilization. According to Redfin data, the median rent in the United States fell 0.3% year-on-year to $1,594 in December 2023, the lowest level since March 2022.

After the data was released, spot gold fell more than $10 in the short term, and then rebounded strongly to return to above the $2,880 mark; the US dollar index rose 50 points in the short term and basically remained strong; non-US currencies fell across the board, with the euro falling 40 points against the US dollar in the short term; the pound fell nearly 70 points against the US dollar in the short term; the US dollar rose nearly 120 points against the Japanese yen in the short term; and US bonds suffered a sharp sell-off. The Bureau of Labor Statistics said that food prices rose 0.4%, driven by a 15.2% increase in egg prices.

Notably, the Bureau of Labor Statistics updated its weights and seasonal adjustment factors, which are the models the government uses to remove seasonal fluctuations from the data to reflect price changes in 2024. Last month's increase in the CPI may partly reflect price increases driven by businesses at the beginning of the year. Businesses may also preemptively raise prices in anticipation of higher and more widespread tariffs on imported goods. The core CPI rose in January, which economists said showed that even after seasonal adjustments, seasonal effects are still lingering in the data.

Wednesday's CPI report is further evidence that the current U.S. anti-inflationary march is in danger of reversing, which, combined with a strong labor market, could keep the Federal Reserve on hold for the foreseeable future. Policymakers are also awaiting more clarity on U.S. President Donald Trump's policies, particularly tariffs, which have already led to rising consumer inflation expectations. The report came a day after Fed Chairman Jerome Powell said the central bank could take a break when it comes to interest rates. Traders are now shifting their expectations for the next Fed rate cut to December from September.

A “Fed mouthpiece” and Wall Street Journal reporter, pointed out that the strong inflation data in January made the Fed's case for further “recalibration” of the interest rate cut path before the middle of the year untenable. Earlier, Trump also called on the Fed to lower interest rates on social media, which would “go hand in hand” with the upcoming tariff policy. Given the “off-the-charts” CPI data, it is foreseeable that the relationship between the Fed and the White House is about to enter a “tense period”. And Powell has made it clear that they will stick to their dual mission and they will not be bullied by any politician.