U.S. inflation hotter than anticipated in January

Investing.com -- Headline annual U.S. inflation decelerated to 3.1% in January, but was faster than economists' projections, in a key economic release that could impact how Federal Reserve officials view the timing of potential interest rate cuts.

Economists had anticipated that the year-on-year reading of the U.S. consumer price index would cool even further to 2.9% from 3.4% in December. 

On a monthly basis, the major gauge of inflation in the world's largest economy sped up to 0.3% from 0.2% in December, suggesting some stickiness in price gains due to stubborn rent costs. Economists had predicted that the measure would be unchanged.

Stripping out volatile items like food and fuel, inflation remained at the same annual pace of 3.9% posted in December and accelerated month-on-month to 0.4% from 0.3%. The figures were seen at 3.7% year-on-year and 0.3% month-on-month.

The Fed has said that it wants to receive more evidence that the pace of price growth is "sustainably" moving towards its 2% target before starting to bring borrowing costs down from more than two-decade highs. The comment, which has been reiterated by several officials at the central bank including Chair Jerome Powell, has all but dashed already waning hopes that the Fed would roll out rate reductions early this year.

According to CME Group's (NASDAQ:CME) closely-monitored Fed Watch Tool, the probability that the bank will slash rates at its next policy gathering in March stood at 15.5% prior to the release of Tuesday's data. One month ago, the chances of a 25 basis-point cut were more than 75%.

Still, Powell has remained largely optimistic that the U.S. economy is on course for a so-called "soft landing" -- a scenario in which inflation is successfully quelled without sparking a broader downturn in either growth or the labor market.

As a result, officials at the Fed now face the task of delicately balancing two major risks: reigniting inflation by moving too soon to cut rates and disrupting economic activity by waiting too long to announce reductions. Powell has stressed that Fed will take a "prudent" approach to rate policy with this dilemma in mind.

U.S. stock market futures were lower following the inflation print, while the dollar index -- a measure of the greenback against a basket of other currencies -- inched higher. U.S. government bond yields, which typically move inversely to prices, also advanced.