Inflation Continues To Cool, But At Slower Pace Than Economists Predicted: Stocks Struggle To Price In The Fed's Next Move

The SPDR S&P 500 (NYSE: SPY) is volatile Tuesday morning after the Labor Department reported a 6.4% year-over-year increase in the consumer price index for January, marking the fourth straight lower print. 

What Happened: The headline CPI rose 6.4% last month, down from 6.5% in December, according to data from the U.S. Bureau of Labor Statistics.

The January CPI reading came in above average economist estimates of 6.2%.

On a month-over-month basis, CPI was up 0.5%, in line with average economist estimates.

Excluding volatile food and energy prices, consumer prices were up 5.6% in January, above average economist estimates for a 5.5% gain, but down from 5.7% in December. 

The Labor Department said energy prices were up 8.7% year-over-year, while food prices climbed 10.1%.

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Why It Matters: Tuesday's highly anticipated CPI inflation reading comes on the heels of two consecutive policy downshifts from the Federal Reserve. 

Following four straight 0.75% rate hikes, the Fed opted for a 0.5% increase in December and then raised rates by just 0.25% at its last meeting. 

The SPY initially moved lower following the most recent interest rate decision as investors focused on the Fed's language that "ongoing increases" would be appropriate, but it reversed and traded higher after Fed Chair Jerome Powell seemed to send the message the central bank may be close to winding down its response to stubbornly high consumer prices.

In an interview at the Economic Club of Washington, D.C. last week, Powell said the Fed remains data-dependent.

Although Tuesday's print is the fourth straight lower headline number, it came in above economist expectations and could be a potential sign the Fed might consider a more aggressive rate hike at its next meeting if the labor market continues to show resilience.

The bond market was projecting a 90.8% chance of a subsequent 0.25% hike in March and a 9.2% chance of a 0.5% hike ahead of the CPI release, according to CME Group data. Following the print, the bond market is signaling a 87.8% chance of a 0.25% hike and a 12.2% chance of a 0.5% hike.

The Fed's next decision on rates is due March 22. 

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SPY Price Action: The SPY is up 0.41% at $414.52 at the time of writing, according to Benzinga Pro.

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