U.S. Economics – Inflation

Intro

The Consumer Price Index accelerated by 0.5% m/m in January, pushing the y/y pace to 3.0%. Importantly, the All Items excluding Shelter Index accelerated by 2.1% y/y, contributing 1.4 points to headline growth. The major takeaway from this release is that inflation remains above the FOMC’s 2% target rate of inflation and has been moving in the wrong direction, making it tougher to justify the need for rate cuts in 2025.

Inflation

The Signals:

• • Headline CPI (Chart 1)
    • Increased by 0.5% m/m, its fastest monthly rate since August 2023, pushing the y/y pace to 3.0% from 2.9% in the prior month.
      • The comparison set rises slightly in February, but the overall trend for the year will be moving against easier comparisons, likely making it difficult to achieve the FOMC’s target.
  • All Items ex. Shelter CPI (Chart 2)
    • Similar to Headline CPI, this component rose by the most since August 2023 at 0.5% m/m.
      • The y/y growth rate has been accelerating sequentially since September and January’s print came in at 2.2%, above the FOMC target.
  • Shelter, Motor Fuel, & Food CPIs (Chart 3)
    • • Shelter accelerated by 0.4% m/m in January, but the y/y pace slowed to 4.4% from 4.6%.
        • We will be watching how the easing comparison set and lagged impact of home price growth from twelve to eighteen months ago affects the y/y trajectory.
      • Motor Fuel increased by 1.8% m/m, following a 4.0% m/m rise in December.
        • This component will likely add to month-to-month volatility in the y/y rate and could contribute to a deceleration of Headline CPI for February.
      • Food increased by 0.4% m/m, its fastest pace since February 2023.
        • Another area we are watching is whether we are moving through a period of structurally higher y/y growth rates for this component of CPI due to changes in the underlying food commodity prices.
  • U.S. Treasury Yields (Chart 4)
    • • Since the September inflection of CPI growth, U.S. Treasury yields have been trending higher.
        • Over that period, the 30-year Treasury yield is up to 4.84% from 3.93%, the 10-year Treasury yield is up to 4.64% from 3.62%, and the 2-year Treasury yield is up to 4.38% from 3.55%.

The Takeaway:

• The Consumer Price Index continues to track above the FOMC’s target of 2% and the underlying Index dynamics have moved in a direction that is likely to make reaching that target difficult, adding to the probability that rate cuts will be pushed out further which has been reflected in the market through higher U.S. Treasury yields.

Visuals:

(Chart 1)

Source: Macrobond

(Chart 2)

Source: Macrobond

(Chart 3)

Source: Macrobond

(Chart 4)

Source: Koyfin

Market Trends:

Source: Macrobond

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.