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US CPI Surprises in January: Market Needs to Recalibrate Expectations for US Interest Rates

US consumer prices unexpectedly surged at the start of the year, with the headline inflation rate increasing by 0.3% and the core inflation, which excludes food and energy costs, rising by 0.4% in January compared to December. On a year-over-year basis, the headline inflation rate climbed by 3.1%, and the core Consumer Price Index (CPI) by 3.9%.

The breakdown revealed price hikes in food, car insurance, and medical care, with shelter costs contributing to more than two-thirds of the overall increase. Notable monthly rises were observed in outpatient hospital services and pet services. Conversely, used car prices saw a significant monthly decline, following an update in methodology. Shelter prices, the most substantial component within services, increased by 0.6%, matching the highest rise since early 2023.

Our Take: Despite today's unexpected increase, the overall trend in inflation is downward. We believe today's figures are not overly concerning, and it's essential to assess how these numbers will influence the crucial core Personal Consumption Expenditures (PCE) figures, especially since shelter costs have played a significant role in the surprise uptick. The recent expectations for aggressive rate cuts were misguided, and today's data simply adjust those expectations to more realistic levels.


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