According to the Consumer Price Index (CPI), inflation rose slightly more than expected in the month of January. The CPI rose by 0.3% month-over-month — against an expected 0.2% — and 3.1% year-over-year — against an expected 2.9%. Right now, the Federal Reserve appears adamant about sticking to its goal of cooling the inflation rate to 2%, expected to hold interest rates higher for longer until mid-2024.

Wolfe Research Chief Economist Stephanie Roth and Sahm Consulting Founder Claudia Sahm sit down with Yahoo Finance to discuss January's CPI print and what it means for the Fed's inflation goals.

"The Fed will respond to reality, right, so they will take on board if the disinflation comes faster than they think," Sahm, a former Federal Reserve Board economist, says. "They also said, we're not going to wait until 2% to do our first cut. So they're going to have to get going at some point this year, but it is really all about the inflation data. At least that's what the Fed has put emphasis on."

Click here to watch the full interview on the Yahoo Finance YouTube page page or you can watch this full episode of Yahoo Finance Live here.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

BRAD SMITH: You think about this data-dependent Fed and at what point they would need to see a significant shift or at least a long enough trend, perhaps, in order to shift their own pathway, as well. What would you be watching for? And what does this data do for that broader trend?

STEPHANIE ROTH: Well, I think it's important to note that January print has had seasonality issues, so it is possible that we'll see a notable deceleration in February and March month. That's actually what we were calling for. We are expecting the seasonality to add about a tenth to the print, and it seems like that might be the case.

Services in particular, you tend to get annual price increases that tend to go into effect in the month of January, and the seasonal just don't appear to be picking that up yet. We've seen this for the past couple of years, that January tends to be a bit hotter than what's the underlying trend. So our base case is certainly-- March is off the table, like Claudia said. Our base case is that they're going to be cutting in June. They want to see a little bit more data, they want to see the year-over-year CPI print come down closer to 2%, which will need another couple of months in order to get there.

RACHELLE AKUFFO: And, Claudia, I know that, obviously, the Fed hyper-focused on that 2% inflation data. But obviously, a lot of this, this is lagging data. So when you look at the strength of the labor market, when you combine that in, how much credence does that give to the cost to the economy of doing too much, versus too little right now?

CLAUDIA SAHM: Well, the Fed is really rolling the dice on the US labor market, and they're leaning on it, saying, hey, we have the luxury of time, the labor market is strong. And yet that doesn't necessarily have to go forward. And we saw in 2023 a strong labor market, a strong GDP growth, and lots of disinflation. So this idea that the two are linked together and there's a trade off, at this point, we ought to be really putting a lot less weight on that. And they have a dual mandate-- getting inflation low and also keeping unemployment low, and both sides of the mandate, they matter.

BRAD SMITH: And so with that in mind, does it feel like-- because we've continued to hear that, Claudia, higher for longer is what investors should be getting used to, what the markets should start to price in. But there's a lot of overexuberance, as Steve Pagliuca was telling us yesterday. And so ultimately, do you believe that higher for longer is something that the Fed is doing a good job of actively communicating, and that the markets actually get it?

CLAUDIA SAHM: Well, sometimes, we don't hear what we don't want to hear. And I think the Fed, as multiple times Jay Powell has gone out and really beat it into people's heads, no March, and finally, the markets listen. Now, I'll say the Fed is data-driven. I think they're more backward-looking than they should be, because monetary policy works forward with lags. And yet the Fed will respond to reality, so they will take on board if the disinflation comes faster than they think. They also said, we're not going to wait until 2% to do our first cut. So they're going to have to get going at some point this year, but it's really all about the inflation data, at least that's what the Fed has put emphasis on.