January CPI inflation came in much hotter than expected this morning, with headline CPI rising at 0.5% for the month – the fastest monthly increase since April 2023. Digging into the numbers, there are reasons to believe that seasonal factors may have played a role in the upside surprise for CPI that could dissipate in coming months. However, January’s hot reading still underscores that downward progress on inflation has stalled again. This also occurs at a time when consumers are expressing some jitters about the potential inflationary impact of new tariffs. On Friday, the University of Michigan Consumer Sentiment Index showed a sharp increase in inflation expectations in their latest survey.
This means that the current Fed “pause” will likely last for an extended period of time as they wait for new information on future policy developments and the impact on inflation. The market quickly re-priced to reflect only one rate cut by the end of this year. The Fed still maintains that even after recent rate cuts, the current policy rate of 4.33% is at a restrictive level and thus should help inflation continue to moderate towards their 2% target over time. The good news is that the odds they pull a complete about-face and consider renewed rate hikes still seem very low.
With the Fed likely out of the picture for some time, the market will sharpen its focus on policy developments out of Washington, incoming economic data, and corporate earnings. So far, so good this year in regards to the overall economy and earnings, with S&P 500 companies easily surpassing expectations as the Q4 reporting season winds down. Therefore, uncertainty surrounding changes to fiscal and trade policy remains the biggest wild card moving forward.
Source: Yardeni Research, as of 2/12/25
Source: Bloomberg, as of 2/12/25
Carl Noble, CFA
Senior Vice President of Investments
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