Consumer prices surpassed economists’ expectations in January, winding down investors’ hopes of early rate cuts.

The Consumer Price Index (CPI), which gauges the cost of living by measuring a ‘basket’ of goods and services, increased 3.1% over the last 12 months, according to a Bureau of Labor Statistics report released on Tuesday. Core CPI, the measurement that excludes volatile goods like food and energy, was also higher than predicted, rising 0.4% from December.

The January report signaled that inflation remains stubbornly high, and well above the Federal Reserve’s 2% goal. The Fed in December set the expectation of about three rate cuts in 2024. Now, bets on initial cuts coming in March are pretty much off the table, as investors and economists begin eyeing June as a more likely contender. Core CPI service sector costs, including housing, transportation and medical care, are key barriers to cooling inflation.

Until recently, the market seemed obsessed with the notion that the Federal Reserve would ease rates faster, said Michael England, chief economist at Action Economics.

“With today’s CPI report, essentially, the market is surrendering some of this sort of crazed optimism that there would be three, four or five easings this year,” Englund said.

The service sector, which makes up more than half of CPI, rose 0.7% since December. Minimum-wage increases took effect across more than twenty states last month, which may account for some of the price increases.

“If we’re going to continue to get disinflation in the coming months, you really need to see it in the service sector, and particularly in terms of housing,” said Jay Bryson, chief economist at Wells Fargo.

Shelter costs are keeping both CPI and core CPI high. They accounted for more than two-thirds of the January increase, rising 0.6% from December and 6% annually. Economists hope this burden will ease as housing supply increases and rents cool off further into 2024, but this looks to be happening more slowly than previously thought.

Volatile food prices increased in January as expected, but a decline in gasoline prices pushed energy costs down by 0.9%. Upticks in core prices were unexpected, however. Medical care and airfares both spiked in January.

In a press release, the White House chose to emphasize wage growth and low unemployment.

“At a time when growth and employment remain strong, inflation declined by two thirds from its peak but we know there’s still work to do to lower costs,” the statement said.

Despite the disappointing report, the economy is in a healthier position than it was this time last year. The recent jobs report came out stronger than expected, too, with a low unemployment rate and 353,000 added jobs. The potential for an economic slowdown if the Fed sustains its 5.2% rate, however, still looms large over economists and consumers alike.

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