Inflation Watch – Biggest Beat in More Than a Year

Bloomberg – US Inflation Tops Forecasts, Dimming Chances for Fed Rate Cuts
Underlying US inflation last month rose by the most since March, diminishing chances the Federal Reserve will lower interest rates anytime soon. The so-called core consumer price index — which excludes food and energy costs — increased 0.4% in January after a 0.2% advance in December, Bureau of Labor Statistics figures showed Wednesday. The advance was broad, including higher prices for prescription drugs, car insurance and airfares…The BLS said nearly 30% of the advance was due to shelter, while grocery prices — namely eggs — also drove up the overall index.

Summary

CPI came in much higher than expectations. Traders now see a roughly 50/50 chance the Fed remains on hold through the September meeting.

Comment

This morning’s CPI release came in much higher than expectations. The headline number beat month-over-month expectations by 0.2%. The last time there was a worse beat was December 2021.

The charts below show how different components are contributing to year-over-year inflation. The first chart below shows that the contributions of food, energy, and goods to headline CPI are already back to historical norms. In other words, we have squeezed those categories for about as much as we can.

Any meaningful declines from here on out need to come from services ex-energy (blue), which still contribute much more than their historical norm to headline inflation.

When breaking down the main contributors to services, such as energy inflation, the overwhelming majority boils down to shelter prices (blue).

Last October, supercore CPI was growing at 3.70% year-over-year. It is now growing by 4.02% year-over-year. Powell has noted Fed officials closely watch this metric, which measures service inflation ex-housing.

On a three- and six-month annualized basis, both headline and core CPI continue trending higher. Three-month annualized headline CPI is now at its highest level since November 2022.

This morning’s hot number altered traders’ thinking on future FOMC rate cuts a bit. They now see very high odds the Fed stands pat at the March (blue) and May (red) meetings. The June meeting (green) is now showing a 37% chance of a rate cut.

While the odds of rate cuts at meetings further out are not shown, it is worth noting fed funds traders see a roughly 50/50 chance the Fed keeps rates steady through September.

We have been vocal that the longer the Fed remains on hold, the more likely we have already seen the end of the rate-cutting cycle. Nick Timiraos even noted this morning that further rate cuts are now at risk.

Inflation was firm in January, no question about it, derailing the case for further "recalibration" rate cuts before mid-year. https://t.co/fPgnl7SJQQ pic.twitter.com/hryzRpSUU6

— Nick Timiraos (@NickTimiraos) February 12, 2025

Interactive Visual

For those who wish to dig deeper into this month’s inflation releases, the interactive visualization below offers charts on CPI, PPI, PCE, global inflation, and inflation expectations. The time frames, subindices, and annualization periods can all be changed for a customized view. This month we default the view to various measures of inflation expectations.