US Consumer Price Index (CPI) Hits 3% Again, Delaying Interest Rate Cuts

Rising Costs in Housing, Food, and Energy Lead to a Setback in Inflation Control

The United States' Consumer Price Index (CPI) rose by 3% in January compared to the same month last year, exceeding expectations and marking an increase from December’s 2.9% rise. This unexpected inflation spike has significantly altered market predictions, suggesting that the Federal Reserve (Fed) will delay any plans to lower interest rates in the near future.

The CPI report, released by the US Department of Labor on February 12, shows a 0.5% rise in January compared to December, surpassing both the previous month’s 0.4% increase and the anticipated 0.3% rise. This marks a broader trend in rising living costs, including housing, food, and energy, which have been driving inflation upwards in recent months. Notably, the increase in housing costs, food prices, and energy prices continues to exert upward pressure on inflation, preventing significant reductions in overall prices.

One of the primary contributors to the CPI increase was housing costs, which climbed 0.4% from the previous month. Housing accounted for about 30% of the total CPI rise, consistently impeding the Fed's efforts to manage inflation effectively. Energy prices also saw a substantial 1.1% increase, with gasoline prices rising by 1.8%. The overall food prices rose by 0.4%, driven by a 15.2% surge in egg prices due to avian influenza. This dramatic rise in egg prices contributed to two-thirds of the increase in food costs, the highest jump since June 2015.

Core CPI, which excludes volatile items like food and energy, also showed an increase of 0.4% from December, bringing the year-over-year rise to 3.3%. This represents a sharper jump compared to the previous month's 0.2% rise and the 3.2% annual increase in December. The core CPI figures are considered a critical indicator of underlying inflation trends, closely monitored by the Fed to gauge the effectiveness of monetary policy.

Despite a resilient labor market and the surprising rise in inflation, the Fed is expected to delay any plans for reducing interest rates. Fed Chairman Jerome Powell, speaking before Congress the day prior, emphasized that the economy is in a relatively strong position, and there is no rush to cut rates further. Powell’s remarks reinforced the idea that the Fed is committed to achieving more significant progress on inflation before considering any additional rate cuts.

The Federal Reserve began its interest rate cuts in September 2024, after raising rates to a peak of 5.25%-5.5% in 2023. These reductions brought the rate down to 4.25%-4.5%, but in January, the Fed chose to hold the rates steady for the first time in several months.

Following the release of the CPI report, financial markets adjusted their expectations. The Chicago Mercantile Exchange (CME) FedWatch Tool now suggests a 65.2% chance that the Fed will keep interest rates unchanged through the first half of 2025, a sharp rise from the 34.1% probability just one week ago. The likelihood of no rate cuts for the remainder of the year also increased from 10.4% to 28.6%.

Josh Jamner, an investment strategist at ClearBridge Investments, stated, "The Fed may have been willing to wait, but with the hot CPI report for January, they’ll likely wait even longer. This report effectively puts the final nail in the coffin for the rate-cut cycle." His analysis indicates that the possibility of future interest rate cuts is now much less likely.

The market's reaction to the inflation news has been immediate. US Treasury bond yields have spiked, with the 10-year Treasury yield increasing by 12 basis points (bps) to 4.65%, and the 2-year Treasury yield rising by 7 bps to 4.36%. Meanwhile, US stock indices have fallen, with the Dow Jones Industrial Average down 0.6%, and the S&P 500 and Nasdaq indexes also showing declines of 0.48% and 0.26%, respectively.