Inflation’s Retreat Slows as Markets Gauge Fed’s Next MoveInflation’sRetreatSlowsasMarketsGaugeFed’sNextMove

US inflation retreated at a slower pace than anticipated in January, prompting investors to weigh further rate hikes by the Federal Reserve. The consumer price index was up 6.4% from a year ago, just below a 6.5% rise in December. Prices gained 0.5% on a month-to-month basis, the biggest increase since October. Meanwhile, wholesale prices posted their largest monthly rise since June, although their increase over the past year eased to 6% from 6.5%. Last week, revisions from the Bureau of Labor Statistics revealed that consumer inflation was more persistent than previously thought at the end of 2022. The latest figures also come on the heels of a strong jobs report, which raised expectations that the Fed will lift rates by 25 basis points twice more before pausing. Investors began pricing in a third hike after digesting news of inflation’s stubbornness in January, interest rate futures showed. Bolstering forecasts for higher rates, consumer demand rebounded last month as retail sales climbed 3% from December.

Signs of economic resilience in the face of tighter monetary conditions have added to uncertainty around the path for central bank policy. However, as rates move closer to their peak, a reallocation back into fixed income is approaching. European investment-grade credit spreads in particular are starting to look attractive in the medium term. PGIM’s 2023 Best Ideas report highlights this and a host of other areas where investors can find promising opportunities.