EconoFACTS

February 12, 2025 | 09:45

U.S. Consumer Inflation Heats Up in January

Economist

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

Scott Anderson , Ph.D.

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

U.S. annual CPI inflation for January increased for the third month in a row due to a sizzling 0.5% monthly rise. We were bracing for a worse than expected number, and, unfortunately, we got it and then some. These renewed inflation pressures are not easily explained away by problematic seasonal adjustment factors. It builds on the pick-up in inflation we saw in the fourth quarter and follows the 100 basis points in Fed rate cuts since September. Finger pointing on the rate cuts will intensify, and market pressures will build on the Fed to stay on hold for a considerable period of time before contemplating another cut. The White House pressure may be heading in the other direction, however, based on the President’s latest post. The January CPI price increase was the fastest monthly pace since August 2023. Consumer inflation year-on-year increased by another tenth of a percentage point to 3.0% from 2.9% in December and a low of 2.4% in September. The inflation rate from a year ago was the fastest since June. We saw an unfavorable pick-up in gasoline prices (+1.8%), energy (+1.1%), commodities (+0.6%), air fare (+1.2%), used motor vehicles (+2.2%), and food (+0.4%) prices last month. Shelter inflation increased 0.4% on a hot 0.7% rise in fuels and utilities. On a softer note, we saw a 1.4% decline in apparel prices, no increase in new car prices, and a modest 0.1% increase in medical care and recreation prices.

Core CPI inflation, excluding food and energy, also jumped to an elevated 0.4% last month from 0.2% in December, the fastest monthly place since March 2024. The 3-month average core CPI inflation is still running at a “hot” 3.8% annualized, well above the Fed’s 2.0% target. The Super-core, services excluding housing and energy, is increasing at an even more over-heated 5.3% annualized rate over the past three months. From a year ago, core CPI inflation increased at a stubbornly elevated 3.3%, up from 3.2% in December.

Bottom Line: Not much to like in today’s January CPI report. The moderation we saw in consumer inflation last summer is no longer visible now. The problem for the Fed is this isn’t just a one-month event, but looks like a real multi-month firming of inflation pressures. It will make the FOMC, which is already cautious and patient regarding future rate cuts, even more so. This is especially true as we wait new announcements on sizable import tariffs. The risk of Fed rate hikes, while still low, is going up.

Fed funds futures are now fully pricing in one quarter point rate cut this year and one more next year. Treasury bond yields were generally trading higher following the CPI release with the 10-Yr yield up 10 basis points. The 2-Yr Treasury yield is trading up 7 basis points. Higher-for-longer interest rates is becoming the mantra again.

Table 1 - United States — CPI

(month/month % change : s.a.)

Source: BMO Economics, Haver Analytics