All lines exceed expectations! The year-on-year growth rate of the U.S. January CPI rises to 3%, and the core CPI accelerates to 0.4%

U.S. January CPI rises across the board, exceeding expectations, supporting the Federal Reserve's cautious rate cuts, with traders adjusting their expectations for the next Fed rate cut from September this year to December.

On February 12, Wednesday, the U.S. Bureau of Labor Statistics released data showing that the U.S. January CPI increased by 3% year-on-year, surpassing expectations and the previous value of 2.9%; the January CPI rose by 0.5% month-on-month, the largest increase since August 2023, exceeding the expected 0.3% and the previous value of 0.4%, marking the seventh consecutive month of acceleration.

The core CPI, excluding food and energy costs, increased by 3.3% year-on-year, exceeding the expected 3.1% and the previous value of 3.2%; the January core CPI rose by 0.4% month-on-month, surpassing the previous value of 0.3% and the expected value of 0.2%.

It is worth mentioning that the report incorporated new weights for CPI components, attempting to more accurately reflect American consumption habits, which resulted in a small adjustment to last year's CPI. Some economists and Fed officials pointed out that when companies implement significant price increases, inflation levels at the beginning of the year tend to be higher.

Component Data

A range of household expenses, including groceries and gasoline, drove the January CPI above expectations. Additionally, the U.S. Bureau of Labor Statistics stated that nearly 30% of the increase came from housing.

The rise in the January CPI was primarily driven by grocery prices, with two-thirds of the increase attributed to the surge in egg prices following a deadly avian flu outbreak. From the component data, it shows that the indices for meat, poultry, fish, and eggs increased. The egg index rose by 15.2%, the largest increase since June 2015, accounting for about two-thirds of the total monthly increase in household food costs.

The core CPI's increase exceeded expectations, reflecting rising prices for auto insurance and airline tickets, as well as a record monthly increase in prescription drug costs.

Hotel accommodation costs and used car prices also rose, possibly influenced by large-scale wildfires in Los Angeles.

As the largest category in services, housing prices increased by 0.4% in January. Among them, the equivalent rent for owner-occupied housing and rent for primary residences both rose by 0.3%.

According to Bloomberg's calculations, excluding housing and energy prices, service prices surged by 0.8%, the largest increase in a year. Central bank officials emphasize the importance of focusing on such indicators when assessing overall inflation trends; however, they more frequently use the Personal Consumption Expenditures Price Index (PCE), which has a lower weight for housing compared to the CPI, explaining why its trend is closer to the Fed's 2% target This Thursday, the United States will release the PPI report, which will provide information on other categories that directly constitute the PCE. The PCE report for January will be released later this month.

Excluding food and energy, the price increase for goods was the largest since May 2023. However, if used cars are excluded, the index showed almost no change.

Market Reaction

After the data was released, market expectations for interest rate cuts retracted, the S&P 500 index fell, and U.S. Treasury yields and the dollar surged:

• Traders adjusted the timing of the next Federal Reserve interest rate cut from September to December, while lowering expectations for a rate cut by the European Central Bank, anticipating a further 75 basis points cut this year. Before the January CPI report is released, traders are inclined to expect two rate cuts this year.
• U.S. Treasury bonds fell, with yields rising at least 8 basis points across the board. The 2-year Treasury yield, which is most sensitive to policy, rose by as much as 9 basis points to 4.38%. The 10-year Treasury yield increased by as much as 10 basis points during the day to 4.64%.

Analysis and Commentary

Overall, the latest CPI report indicates that the U.S. inflation process faces the risk of reversal, and coupled with a solid labor market, the Federal Reserve is likely to remain on hold for the foreseeable future.

The latest CPI is crucial for the U.S. Treasury market. According to Goldman Sachs analyst Paolo Schiavone's warning, the CPI data results will open the door for the bull-bear battle in the bond market.

Before the data was released, Anastasia Amoroso, chief investment strategist at iCapital Network, stated on Bloomberg TV, "The Federal Reserve's focus has shifted from the labor market to inflation, which is a significant change."

After the CPI data was released, renowned financial journalist Nick Timiraos, known as the "new Federal Reserve correspondent," stated that the strong U.S. inflation data for January is beyond doubt. This undermines the rationale for the Federal Reserve to further 'readjust' its rate cut path before mid-year.

Previously, Federal Reserve Chairman Jerome Powell stated on Tuesday that, given the resilience of the economy, the Federal Reserve does not need to rush to lower interest rates. Although Powell was reluctant to comment on trade policy, he indicated that he and his colleagues must consider the "net effect" of all U.S. government policies (including tax and immigration policies) on the economy.

During Wednesday's hearing, Powell stated that the CPI data released on that day indicated that we are close to, but have not yet achieved, the Federal Reserve's long-term inflation target of 2%. He also mentioned that the Federal Reserve might adjust rates due to tariffs.

Current Federal Reserve policymakers are still waiting for further clarity on President Trump's policies, especially tariffs, which have led to rising consumer inflation expectations. Policymakers are also closely monitoring wage growth, as it helps to understand expectations for consumer spending, which is the main engine of the U.S. economy Former U.S. President Trump posted on Truth Social earlier on Wednesday, stating that the Federal Reserve should lower interest rates, and subsequently hinted that the inflation data is attributed to former President Biden. The Director of the White House National Economic Council, Hassett, stated that we will address America's inflation issue, regardless of whether the Federal Reserve is involved