The most recent Consumer Price Index (CPI) report for January indicates that U.S. consumer prices rose more than anticipated, with a 0.3% increase from the previous month and a 3.1% increase over the previous year.

These figures surpassed economists' forecasts, which had predicted a 0.2% month-over-month increase and a 2.9% annual increase. The core CPI, which excludes the more volatile costs of food and gas, also rose by 0.4% month-over-month and 3.9% year-over-year, suggesting underlying inflationary pressures remain persistent.

If you’ve been through the drive through of McDonald’s recently, you know inflation is hot.

This pressure has ramifications for consumer spending…and buying power moving forward. Here’s what we’re watching…

High-Level Takeaways:

• Inflation Remains Above Expectations: The CPI data for January indicates that inflation is still running hotter than expected, which could complicate the Federal Reserve's efforts to bring inflation down to its 2% target.
• Market Reactions and Fed Expectations: Following the report, market expectations for the Federal Reserve to hold rates steady at its next meeting increased significantly. This shift reflects a growing consensus that it might be too soon for the Fed to consider rate cuts, especially in light of persistent inflationary pressures.
• Sector-Specific Inflation Dynamics: The report highlighted significant inflation in shelter costs, contributing to the higher core inflation reading. Conversely, prices for used cars and trucks continued their downward trend, while energy prices fell. Food prices, both at home and away from home, rose moderately.

Implications for Fed Rate Cuts:

Given the higher-than-expected inflation figures, it's likely that the Federal Reserve will adopt a cautious stance on adjusting interest rates. The anticipation of ongoing inflationary pressures, as reflected in the core CPI, suggests the Fed may delay any rate cuts to later in the year, contrary to some market participants' earlier expectations. This is further supported by commentary from economists suggesting a "bumpy path ahead" for inflation, which may influence the Fed's timeline for rate adjustments.

Implications for Consumer Spending:

• Impact on Disposable Income: Higher inflation, particularly in essential categories like shelter and food, may reduce consumers' disposable income, potentially impacting their spending capacity on discretionary goods and services.
• Consumer Sentiment: Persistent inflation can affect consumer sentiment, making households more cautious about spending, especially on big-ticket items that are not immediate necessities.
• Sector-Specific Effects: While some sectors, like the automotive sector (with declining prices for used cars), may see a different impact, overall consumer spending trends could be moderated by the inflationary environment, especially if wage growth does not keep pace with inflation.
• One sector to watch is travel. Reports from Delta indicate robust demand for Summer 2024. But Expedia noted slowing gross bookings. What’s going on? It looks like consumers are prioritizing international travel, which hinders a company like EXPE who is still building its international travel options.
• This could have implications for another travel giant, set to report earnings this week: Airbnb (ABNB).
• LikeFolio data shows relative weakness for ABNB in 2 metrics that are predictive of upcoming bookings: web visits and consumer happiness levels.

ABNB web visits have slipped by -8% YoY, a sign demand may be slowing down a bit.

And consumer happiness levels trail traditional peers.

Moving forward we’ll be watching for any other potential ripple effects of lingering inflation on consumer spending – and members will be the first to know when we spot an opportunity.