ย US CPI inflation landed well above expectations in January, with headline inflation rising to 3.0% and core CPI jumping to 3.3% after sharp 0.5% and 0.4% month-on-month increases, respectively.
The dollar has surged while US equity futures have slumped as markets have pushed back the first fully priced rate cut to January 2026.
However, this report is not quite as scary as it seems. The upward pressure is coming primarily from the fading deflation in core goods and an uptick in energy prices.
In the services sector, which better reflects the underlying momentum, we continue to see steady progress, particularly in the shelter component.
We also have to consider the potential impact of residual seasonality, or a โJanuary effectโ, that muddies the signal somewhat.
So, the uptick does not derail the longer-term downward trend in inflation. Nor does it suggest that rates are no longer headed downwards, or that a hike might be the sensible next move. But it does reaffirm the consensus that cuts are going to come much more slowly than we had thought towards the end of last year.
I still think the Fed can cut once or twice in 2025, although not until at least the June meeting.
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