The January CPI report came in hotter than expected, raising concerns that inflation may be reaccelerating and forcing the Federal Reserve to hold off on rate cuts for longer than previously anticipated.
Headline CPI rose 0.5% MoM (vs. 0.3% expected), the highest since August 2023.
Core CPI rose 0.4% MoM (vs. 0.3% expected), the highest since March 2023.
Market reaction: Bond yields surged, equities fell, and rate cut bets shifted later into 2025.
Fed Policy Implication: High inflation readings significantly reduce the probability of a March rate cut, with some analysts warning the Fed might even raise rates if inflation persists.
1. Breakdown of January CPI Data
1.1 Inflation Breakdown (MoM Growth)
Category
MoM % Change
Key Takeaways
Headline CPI
0.5%
Largest increase since August 2023, exceeding all forecasts.
Core CPI
0.4%
Highest monthly gain since March 2023, raising concerns of sticky inflation.
Supercore Services (ex-housing)
0.8%
Wage-driven inflation is resurfacing, a bad sign for the Fed.
Shelter Costs
0.4%
Contributed ~30% of total CPI increase.
Energy Prices
1.1%
Gasoline up 1.8%, fuel oil up 6.2%.
Food Prices
0.5%
Egg prices jumped 15.2% due to avian flu impact.
Auto Insurance
2.0%
Major driver of inflation, with rising claims and repair costs.
Used Cars & Trucks
2.2%
Seasonality may have inflated this category’s contribution.
1.2 Year-Over-Year Inflation Data
Metric
YoY % Change
Expected
Headline CPI
3.0%
2.9%
Core CPI
3.3%
3.1%
Key Inflation Observations
The core inflation measure is still running well above the Fed’s 2% target, raising the risk that inflation may not be slowing as much as previously thought.
Supercore services saw the largest increase in a year, suggesting wage pressures are still feeding into inflation.
Eggs, energy, and education costs contributed significantly to price gains.
Shelter remains a persistent problem, accounting for nearly one-third of total inflation.
2. Market Reaction & Economic Sentiment
2.1 Equity Markets Reaction
S&P 500 futures fell 1.1% initially but recovered some losses.
The materials sector declined the most, while healthcare was the most resilient.
The VIX (volatility index) surged, showing increased investor uncertainty.
2.2 Bond Market & Interest Rate Swaps
US Treasury yields surged, as investors priced in fewer rate cuts in 2025.
2-year Treasury yield jumped 9bps to 4.37%, above the Fed funds rate of 4.33%.
The interest rate swaps market now only prices in one 25bps rate cut by December 2025, down from expectations of two cuts before the report.
The dollar strengthened by 0.4%, reflecting expectations of a stronger-for-longer Fed stance.
2.3 Federal Reserve Rate Policy Outlook
Scenario
Probability
Implication
Rate Cut in March 2025
5% (was 35%)
Near-zero probability after hot CPI data.
Rate Cut in June 2025
40% (was 60%)
Inflation must cool significantly for this to happen.
First Rate Cut in December 2025
55% (was 40%)
More likely as inflation moderates in H2.
No Rate Cuts in 2025
25% (was 10%)
Sticky inflation could force Fed to hold rates steady.
Rate Hike in 2025
10% (was 0%)
Not priced in yet, but a rising possibility if inflation remains elevated.
2.4 Economic Sentiment: Bearish Near-Term, Cautiously Optimistic for 2025
Short-term risks: Sticky inflation, persistent shelter costs, higher energy prices, and Fed uncertainty.
Medium-term optimism: If tariffs do not push inflation higher and economic conditions slow naturally, disinflation may resume.
Recession risk: Lower but still present if high rates cause economic stagnation in late 2025.
3. Federal Reserve Policy & Inflation Outlook
3.1 What This Means for the Fed
Fed Chair Jerome Powell’s testimony later today will be crucial—markets will watch for any sign of shifting rhetoric.
The Fed’s dual mandate (inflation & employment) still allows patience, as the labor market remains strong.
The Fed will likely remain on hold until at least June, but persistent inflation could force a longer pause or even a rate hike in 2026.
3.2 Factors That Could Influence Future Inflation
Tariffs: Trump’s new tariffs on China and other nations could add upward pressure to consumer prices in late 2025.
Labor Market: If wage growth continues rising, inflation could remain sticky, limiting the Fed’s ability to cut rates.
Energy Prices: Volatility in oil & gas prices could impact future inflation prints.
3.3 Long-Term Inflation Outlook
Bloomberg Economics projects core CPI to settle at ~3% by late 2025, above the Fed’s 2% target.
The "January Effect" may have skewed this month’s data, but inflation risks remain on the upside.
4. Conclusion & Final Takeaways
January’s CPI report was hotter than expected, raising doubts about near-term rate cuts.
The bond market repriced Fed rate cut expectations, now pricing in one cut by December instead of September.
Sticky inflation & strong wage growth could force the Fed to hold rates high well into 2025.
Equities remain vulnerable, with higher rates weighing on valuations.
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Final Call:The probability of a Fed rate cut in the first half of 2025 has collapsed to 5%, while the chance of no cuts at all in 2025 has risen to 25%. If inflation remains high into Q2, discussions of a Fed rate hike in 2026 could emerge.
Seasoned Investment Banker with a wealth of expertise in a variety of financial sectors. I handled everything from mergers and acquisitions to investment to venture capital to angel investing.
