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US inflation fell more than expected to 2.4 per cent in January, prompting investors to increase bets on interest rate cuts from the Federal Reserve as price pressures ease in the world’s biggest economy.
Friday’s figure from the Bureau of Labor Statistics was down from 2.7 per cent in December and below the 2.5 per cent expected in a Bloomberg poll of economists.
The yield on two-year Treasuries, which tracks interest rate expectations, fell 0.05 percentage points to 3.42 per cent as investors bet that the Fed is now more likely to cut interest rates sooner.
“We continue to expect two cuts this year, with the next move coming in June,” said Lindsay Rosner at Goldman Sachs Asset Management, emphasising that the Fed’s room for manoeuvre will largely depend on the health of the labour market.
But traders in the futures markets increased bets on a third interest rate cut this year, moving the odds to 50 per cent.
The US dollar weakened against the pound to $1.36, erasing modest gains earlier in the day.
According to Friday’s data, core inflation, which strips out volatile food and energy prices, fell to 2.5 per cent, in line with Wall Street expectations.
Housing related costs which had helped push up overall inflation levels in recent months, fell to 3 per cent in January, down from 3.2 per cent the previous month.
The release comes after the Fed held rates at a range of 3.5 per cent to 3.75 per cent in January, following three straight quarter-point reductions, with chair Jay Powell pointing to a stabilisation in the labour market.
Official figures released on Wednesday showed the economy added 130,000 jobs last month, almost double economists’ forecasts, in an indication that the labour market had regained momentum following a string of bleak data.
This is a developing story