Hot CPI Dashes Hopes for a Mid-Year Rate Cut

• Treasury yields have gapped higher on the hotter-than-expected CPI report, and it has also dashed hopes for a mid-year rate cut.  While firms typically build in annual price increases in January, with all the tariff talk some may have added a bit more this year which may have overwhelmed the seasonal adjustment. In any event, the market reaction could temper some of the tariff discussion going forward.  Currently, the 10yr Treasury is yielding 4.65%,  up 12bps on the day, while the 2yr is yielding 4.36%, up 7bps on the day.

 

• As expected, Fed Chair Powell didn’t reveal any new information in his appearance before the Senate Banking Committee yesterday. In fact, the preponderance of questions were not so much about the future of monetary policy but rather the fate of the CFPB and several questions concerning crypto-related accounts being “debanked”.  When the topic of monetary policy did surface, Powell reverted to the tried and true, mentioning policy “is in a good place” and “there is no urgency to move given the solid economic performance.” He’ll appear today before the House Financial Services Committee at 10am ET. Given the hot inflation read we may hear a slightly more downbeat Powell, and while rate hikes aren’t on the table, it will probably get asked.

 

• The big inflation report is out this morning with overall and core CPI hotter-than-expected. The core rate increased a solid 0.4% (0.446% unrounded), a tenth higher than expectations, and matching last January’s print, which sent the YoY rate a tenth higher to 3.3% (3.258%) vs. 3.1% expected and 3.2% (3.238 unrounded) in December. So, the initial take is that the hot seasonals from last year seem to be re-occurring this year. Recall last year saw three straight months of 0.4% core CPI prints, and at least for January that is repeating itself and will push rate cuts out to late 2025, if at all.

 

• Overall CPI rose 0.5% (0.47% unrounded), above the 0.3% expectation and the 0.4% print in December. The 0.5% MoM rate was the highest since August 2023 and was driven by food (up 0.4% with eggs leading the way up 15.1%), energy (1.1%), and shelter (0.4% which accounted for 30% of the monthly increase), also contributed to the increase. The overall CPI YoY rate rose to 3.0%, above the 2.9% expectation, and December’s 2.9% print and the highest YoY rate since last June. The increase in December (from 2.7% to 2.9%) was attributable to the energy sector but January’s increase was more broad-based which is another concern for the Fed.

 

• Moving back to the core reading, core services ex-housing put in an ugly month increasing 0.76%, the highest since last January (see graph below).  The service sector has been driving the economy for more than a year, and the pop in January was broad-based with shelter (0.4%), car insurance (2.0%) and recreation services (1.4%), leading the way.  The so-called revenge spending doesn’t seem to be relenting, and firms are taking advantage with these price bumps.

 

• Meanwhile, the ever-important Owner’s Equivalent Rent (OER) remained at 0.3% for a third straight month and remained below the 0.4% – 0.5% readings that prevailed for much of 2024. However, other shelter categories like lodging saw increases which kept the overall shelter component elevated (0.4%) .

 

• On net, the hot inflation read dashes hopes for a mid-year rate cut with futures now looking at December as the first and only cut for 2025 (see table below). Given the broad-based nature of the gains, it looks like the usual annual price increases which could have been goosed a bit more given the constant stream of tariff talk.  The big misses were core goods (0.28%, highest since May 2023), likely reflecting a jump in used car prices (2.2%) and the core services pop of 0.76% which was the highest since last January’s 0.83%. We’ll get PPI tomorrow and the odds have increased that it will disappoint to the high side as well, which could further delay improvement in the retail level of inflation.

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CPI and Core CPI – Broad-Based Gains Led to a Rebound in YoY Rates

Source: Bloomberg

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Core Services Ex-Housing – Highest Since Last January

Source: Bloomberg

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Futures See First Rate Cut in December after Hot CPI Report

Source: Bloomberg