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The Consumer Price Index (CPI) rose 0.5% in January, well above (worse) than the 0.3% rise that the street was expecting. This is now the 7th straight month where the CPI has increased at a faster rate than the prior month, and the monthly percentage increase hasn’t been this high in 17 months.

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As a result, the annualized rate of inflation rose to 3.0%, up from 2.9% last month. Annualized inflation has not gone from 2.4% to 3.0% in 4 months.

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Core inflation (or CPI minus food & energy) also came in worse than expected, with a gain of 0.4% in January. The last time core CPI came in this hot was 21 months ago.

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The annualized rate of core inflation remains stuck around the 3.3% level, which is still well above the Fed’s 2% target.

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Breaking down the price increase by category, we can see the gains were pretty broad based among categories. With only apparel being the lone category where prices decreased. Transportation and used cars & trucks, along with energy, led the way in January.

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Price gains over the last 12 months were also broad based among categories, with only new vehicles being the lone decliner. Annual inflation was led by transportation, services, and medical care.

Overall a pretty lousy start to the new year on the inflation fight. The spike in inflation expectations appears to have become a self-fulfilling prophecy in January. The Fed really has no room to cut rates anytime soon. I think the market can get over the fact that we may have to wait longer for rate cuts, but I don’t think we’ve priced in the potential for any future rate increases. I’m not predicting this, and its still a low probability outcome at the moment. But its not 0% either.

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