US Jan-25 inflation bounces to 3.0%, led by core inflation

14 Feb 2025 , 09:50 AM

LAST MILE INFLATION IS BAD, TRUMPONOMICS CAN MAKE IT WORSE

Just about 6 months back, it looked like the US had well and truly uncorked the low-inflation genie. However, that optimism proved to be short-lived as inflation has been on a steady uptrend. For January 2025, the US CPI inflation has touched 3.0%, a good 100 bps above the Fed target of 2.0%. The slew of tariffs imposed by Trump on China, Mexico, and Canada are only going to drive domestic inflation higher. We have to await the PCE inflation data towards the end of the month, but even that is unlikely to offer any respite.

What does this imply for the Fed rate trajectory. We will look at the CME Fedwatch reading later, but suffice to say that the inflation indications are not too positive. The Fed has already cut rates by 100 bps between September and December; and had rightly taken a pause in January. However, with elevated inflation, trade war risks, and GDP growth still above 2.5%; the Fed is unlikely to cut rates in a hurry. For now, it is likely to be wait and watch as the markets absorb the side-effects of Trumponomics on growth and prices.

ENERGY AND CORE BASKET TRIGGER INFLATION BOUNCE IN JANUARY

A spike in energy inflation and core inflation; amidst flat food inflation led to the headline US inflation for January touching 3.0%; up 60 bps in last 4 months.

Inflation Basket Category	Jan 2025 (YOY)	Inflation Basket Category	Jan 2025 (YOY)
Food Inflation	2.50%	Core Inflation	3.30%
Food at home	1.90%	Commodities less food and energy	-0.10%
·         Cereals and bakery products	0.40%	·         Apparel	0.40%
·         Meats, poultry, fish, and eggs	6.10%	·         New vehicles	-0.30%
·         Dairy and related products	1.20%	·         Used cars and trucks	1.00%
·         Fruits and vegetables	0.30%	·         Medical care commodities	2.30%
·         Non-alcoholic beverages	2.20%	·         Alcoholic beverages	1.40%
·         Other food at home	0.80%	·         Tobacco and smoking products	6.80%
Food away from home	3.40%	Services less energy services	4.30%
·         Full service meals and snacks	3.30%	Shelter	4.40%
·         Limited service meals	3.30%	·         Rent of primary residence	4.20%
Energy Inflation	1.00%	·         Owners’ equivalent rent	4.60%
Energy commodities	-0.50%	Medical Care Services	2.70%
·         Fuel oil	-5.30%	·         Physician Services	2.10%
·         Gasoline (all types)	-0.20%	·         Hospital Services	2.90%
Energy services	2.50%	Transport Services	8.00%
·         Electricity	1.90%	·         Motor vehicle Maintenance	5.90%
·         Natural gas (piped)	4.90%	·         Motor vehicle insurance	11.80%
Headline Consumer Inflation	3.00%	·         Airline Fare	7.10%

Data Source: US Bureau of Labour Statistics

In the US, the CPI inflation acts as a lead indicator for PCE inflation, which sets the tone for Fed rate action. Here are key takeaways from the data.

• Food inflation in January was flat at 2.5%. Four of the six major grocery groups spiked with pressure from meats, fish, eggs, and poultry products.
• Energy inflation spiked 15- bps at 1.0% in Jan-25. The price of gasoline bounced back, back sharply, but the actual pressure came from energy services.
• Why did core inflation bounce to 3.3%? The bounce in core inflation essentially came from rental costs, medical costs, and motor insurance in January 2025.

While it is a concern that headline CPI inflation in the US is up 10 bps to 3.0%, the bigger worry is the likely impact of Trump’s punitive tariff  policies on global demand.

JANUARY 2025 MOM INFLATION SPIKES TO 0.5%

Here is the month-on-month (MOM) inflation for last 6 months.

Month	Food (MOM)	Energy (MOM)	Core (MOM)	Headline (MOM)
Aug 2024	0.1%	(0.8%)	0.3%	0.2%
Sep 2024	0.4%	(1.9%)	0.3%	0.2%
Oct 2024	0.2%	0.0%	0.3%	0.2%
Nov 2024	0.4%	0.2%	0.3%	0.3%
Dec 2024	0.3%	2.6%	0.2%	0.4%
Jan  2025	0.4%	1.1%	0.3%	0.5%

Data Source: US BLS (negative figures in brackets)

The headline MOM inflation has spiked 30 bps in last 3 months from 0.2% to 0.5%; marking a clear upward shift, compared to the trend of last 6 months.

1. MOM food inflation in January 2025 increased to 0.4%. Most of the pressure on the food basket came from the high protein items in the food basket.
2. The MOM Energy inflation has slightly sobered to 1.1% in January 2025. For now, the concerns are not about sanctions, but about insufficient demand for oil.
3. The MOM Core inflation jumped to 0.3% in January 2025 giving the first indication of pressure on the core basket. Rentals and medical services have spiked this month.

Overall, the high frequency MOM inflation captured the essential story of January 2025; with core inflation and energy inflation being the real problem areas.

CME FEDWATCH OPTIMISM ON RATE CUTS WANING

Here is how the CME Fedwatch (based on implied probabilities in Fed Futures trades) probabilities look like after Jerome Powell’s testimony to the Congress.

Fed Meet	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450	450-475
Mar-25	Nil	Nil	Nil	Nil	Nil	Nil	2.5%	97.5%	Nil
May-25	Nil	Nil	Nil	Nil	Nil	0.3%	14.2%	85.5%	Nil
Jun-25	Nil	Nil	Nil	Nil	0.1%	4.4%	35.0%	60.6%	Nil
Jul-25	Nil	Nil	Nil	Nil	0.8%	9.4%	39.2%	50.6%	Nil
Sep-25	Nil	Nil	Nil	0.2%	3.3%	18.0%	42.5%	36.0%	Nil
Oct-25	Nil	Nil	Nil	0.8%	5.8%	22.2%	41.4%	29.8%	Nil
Dec-25	Nil	Nil	0.2%	1.9%	9.6%	26.7%	38.7%	22.9%	Nil
Jun-26	Nil	0.1%	0.9%	4.6%	14.6%	29.4%	33.7%	16.7%	Nil
Dec-26	0.3%	1.7%	6.2%	15.8%	26.5%	27.8%	16.4%	4.7%	0.5%

Data source: CME Fedwatch

As of December 2024, the Fed has cut rates by 100 bps to the range of 4.25% to 4.50%, but held status quo in January meet. Here are the expectations up to December 2026.

• As of Jun-25, the probability of status quo (4.25%-4.50%) is 60.6% and that of a 25 bps rate cut is around 35.0%.
• As of Dec-25, there is still a 23% probability of status quo, 77% probability of 1 rate cut and a 39.6% probability of 2 rate cuts (less likely).
• As of Jun-26, there is still a 50.4% probability that rate cuts will not be more than 25 bps from current levels and 49.6% probability of 2 rate cuts or more.
• By Dec-26, there is still 22% probability of up to 1 rate cut only and 52% probability of not more than 2 rate cuts.

These are early days to project 2026 probabilities, but the message from CME Fedwatch is that there could, at best, be 1 more rate cut of 25 bps in 2025 and another 25 bps in 2026.