CPI surprise highlights Fed dilemma: cut now or wait?

• Real interest rates remain restrictive at 3.5%-3.75%, materially higher than inflation, prompting calls for modest rate cuts to prevent overtightening in sectors like housing and business investment
• Market focus is shifting away from rate cut speculation toward corporate fundamentals and AI disruption potential, with the Fed expected to proceed cautiously with only a couple of rate cuts later in 2026
• January's report showed mixed components: airfares jumped while used car and shelter costs softened, maintaining a gradual disinflation trend that keeps the possibility for easing alive

CPI Surprise Highlights Fed Dilemma: Cut Now or Wait?

Key Figures:

US inflation eased in January, with the Consumer Price Index rising 2.4% year-over-year, below the 2.5% forecast. Core CPI (excluding food and energy) held at 2.5%, its lowest level since March 2021. Month-over-month, both headline and core prices increased 0.3%. The Fed's current target range stands at 3.5% to 3.75%.

Market Implications:

The cooler-than-expected inflation data has sparked debate about the Federal Reserve's next move. While inflation is moderating, a March rate cut remains highly unlikely. Analysts suggest the Fed may cut rates "a couple of times later this year," with timing dependent on labor market conditions.

Expert Perspectives:

Nigel Green, CEO of deVere Group, argues that real interest rates remain restrictive and policy is "increasingly misaligned with present conditions." He advocates for modest cuts to prevent overtightening, particularly in interest-sensitive sectors like housing and business investment. However, he acknowledges the Fed will likely maintain a hawkish stance while inflation remains above the 2% target.

Gina Bolvin of Bolvin Wealth Management highlighted that consumer pushback and companies absorbing costs are keeping pricing power in check, shifting investor focus from rate cuts to company fundamentals. Chris Zaccarelli of Northlight Asset Management noted markets are more interested in AI disruption than rate speculation.

Technical Details:

Wells Fargo reported that core CPI was pushed higher by surging airfares, offset by softer used car and shelter costs. The gradual disinflation trend keeps the possibility of easing alive for later in 2026, though policy remains cautious. Overall, the data suggests the Fed has flexibility as economic conditions stabilize.