The US just got the latest sign that it could be a while before the next rate hike

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  • The consumer price index, a key gauge of inflation, was unchanged in January.
  • That could signal the Federal Reserve will stick to the dovish tone it took at its last meeting.
  • “Chances of a rate hike this year are slim and getting slimmer,” one analyst said following the CPI data.

All eyes have been on inflation following the Federal Reserve’s apparent reversal towards a more dovish monetary-policy approach last month. And the latest reading suggests it could be a while before borrowing costs rise, according to market watchers.

The Department of Labour said Wednesday that consumer prices were unchanged in January on a seasonally adjusted basis, offset in part by lower fuel prices. Excluding the volatile energy and food components, the consumer price index rose 0.2% from a month earlier.

“It’s likely a signal to many that we’re back in the Fed’s sweet spot of low inflation and strong economic fundamentals,” said Mike Loewengart, vice president of investment strategy at E*Trade. “Chances of a rate hike this year are slim and getting even slimmer.”

In January, the Fed held interest rates steady and signalled it could be nearing the end of its latest tightening cycle. The central bank dropped a reference to “further gradual increases” after bringing its benchmark interest rate to a target range of between 2.25% and 2.5% the month before.

The January jobs report had cast some doubt on a dovish Fed, with the US added significantly more nonfarm payrolls than expected and wages ticking higher. But observers say price levels remain key going forward.

“It’s clear that recent market movements have led to a material shift in the Fed’s policy reaction function,” Bank of America Merrill Lynch analysts wrote in a research note following the FOMC meeting. “Most importantly, we would need to see inflation pick up and financial conditions ease with a resolution on some of the global downside risks.”

Still, medium-term risks are building as wages accelerate, according to Pantheon Macroeconomics chief economist Ian Shepherdson. Last month, average hourly earnings increased by 3.2% from a year earlier.

“The broad trends in core inflation over the past year show that core goods prices are now rising slowly, while the rates of increase of rents and other services have dipped a bit,” he said.

“We think this picture will flip over the course of this year, with core goods inflation levelling off – sooner or later, used auto prices have to correct – but faster wage increases pushing up rent and other services inflation.”

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