Both CPI and core CPI continued to rise in January, exceeding market expectations, according to the U.S. Bureau of Labor Statistics on February .While the Jan inflation data was driven by several short-term and seasonal factors, housing service prices have maintained a gradual downward trend, indicating that inflation still has room for further cooling in the future.
However, Trump's tariff policies and rising market inflation expectations have made the Federal Reserve more cautious in its monetary policy approach. The market now widely expects a limited rate cut this year, with the timing further delayed.
The U.S. CPI annual growth rate for January was 3.0% (prior: 2.9%), marking the fourth consecutive month of acceleration, with a monthly increase of 0.5% (prior: 0.3%). Core CPI grew by 3.3% year-over-year (prior: 3.2%), with a monthly increase of 0.4% (prior: 0.2%), both exceeding market expectations.
Breaking down the details, the CPI increase was primarily driven by the following categories:
- Energy prices rose 1.1% month-over-month (prior: 2.4%), with fuel oil prices surging 6.2% (prior: 2.1%). However, declines in other energy prices offset most of the overall gain.
- Food prices increased by 0.4% month-over-month (prior: 0.3%), with egg prices soaring 15.2% (prior: 0.7%), contributing to over 60% of the food price increase—the highest since June 2015.
- Core goods prices rebounded to a monthly increase of 0.3% (prior: 0.0%), led by used car prices jumping 2.2% (prior: 0.8%). However, apparel prices fell to -1.4% (prior: 0.1%), partially offsetting the gains.
- Core services prices rose 0.5% month-over-month (prior: 0.3%), with the largest component—housing services—climbing 0.4% (prior: 0.3%). Rents and owners' equivalent rent remained stable at 0.3%. Additionally, auto insurance costs surged to 2.0% (prior: 0.5%).
(Source: BLS)
Overall, the increases in energy, eggs, used cars, and auto insurance in this inflation report were all driven by short-term or seasonal factors, such as increased fuel demand due to winter storms, avian flu causing a spike in egg prices, and California wildfires driving up used car and insurance costs. These factors contributed to the additional volatility in January's CPI reading.
However, the annual growth rate of housing services prices continued to decline to 4.4% (prior: 4.6%), with rent and owners' equivalent rent annual growth also easing to 4.2% (prior: 4.3%) and 4.6% (prior: 4.8%), respectively. This indicates that the main driver of core inflation is gradually diminishing.
As these short-term factors fade, overall inflation is still expected to decline due to continued downward pressure on new lease rents and weak global crude oil prices. However, the pace of decline may be slower than anticipated due to persistent short-term factors and the gradual nature of the housing services price slowdown.
Federal Reserve Chair Jerome Powell stated during his congressional testimony on February 11 that given the strong economy and resilient labor market, the restrictive stance of interest rates has already eased.
Additionally, Trump's tariff policies have increased inflationary risks and raised consumer inflation expectations. As a result, Powell emphasized that it is more prudent for the Fed to take a wait-and-see approach to assess the impact of interest rates on inflation and the labor market, as well as the implementation of policy measures.
Following the latest inflation data release, Powell reiterated during his testimony on February 12 that while the Fed has made significant progress in reducing inflation, "there is still more work to do." This statement reinforced expectations that the Fed will hold off on rate cuts this year to further monitor economic conditions.
According to FedWatch , the market now expects only a 25 bps rate cut in 2025, with the timing pushed back to October. Meanwhile, the U.S. 10-year Treasury yield rose by 8.8 bps to around 4.63%.