Hot Inflation Print Pushes Next Rate Cut to December — Evening Brief – 02.12.25

The Consumer Price Index (CPI) for January rose by 0.5%, above the 0.4% increase in December and exceeding the consensus estimate of 0.3%, indicating inflation pressures remain in the U.S. economy. Year-over-year, CPI increased by 3.0%, also surpassing the 2.9% increase from the prior month and the 2.9% consensus forecast.

Core CPI, which excludes food and energy prices, climbed by 0.4% in January, surpassing the consensus estimate of 0.3% and the previous month’s increase of 0.2%. On a year-over-year basis, Core CPI increased by 3.3%, higher than the 3.1% consensus and the 3.2% increase from December.

There is no denying that the January CPI report is hot, showing persistent inflationary pressures across key categories like shelter, energy, and food. Given this, along with the upside risks to inflation from potential tariffs—which could further drive prices higher—the market is understandably skeptical about the Federal Reserve justifying interest rate cuts in the near term.

The market’s expectations for an interest rate cut have indeed shifted. According to the CME FedWatch Tool, the probability of a quarter-point rate cut in December has increased to 40.7%, up from 37% before the release. However, the odds of a rate cut in September or earlier have decreased as 41.2% of traders now expect a cut in September, down from 42.5% before the report. The likelihood of a 25-basis point cut in July and June has also been reduced.

“This is data that’s telling the Fed you’re fine where you are, and if anything, there might be some risk that rates aren’t high enough,” Andy Schneider, senior U.S. economist at BNP Paribas, told the Wall Street Journal.

Although the Fed typically favors the Core Personal Consumption Expenditures (PCE) index to monitor long-term inflation trends, the CPI data indicates that inflation has deviated further from the Fed’s 2% target.

Jim Reid, a strategist at Deutsche Bank, pointed out an interesting historical pattern: over the last 25-plus years, CPI surprises tend to be more likely to bias to the upside in the first half of the year than in the second half. This suggests that inflation may face additional upward pressure in the early months of the year before potentially easing later on.

“These numbers are uncomfortable for the Fed,” warned Seema Shah, chief global strategist at Principal Asset Management. “If this persists into the next few months, inflation risks may become too heavily weighted to the upside to permit the Fed to cut rates at all this year.”

Meanwhile, the index for shelter increased by 0.4% month-over-month, accounting for nearly 30% of the overall headline CPI increase, according to the BLS, indicating that housing costs continue to be a major contributor to inflationary pressures.

The energy index rose by 1.1% month-over-month with gasoline prices seeing a significant increase of 1.8%. The food index climbed by 0.4% as well, with food at home rising by 0.5% and food away from home increasing by 0.2%

“The rise in consumer prices was broad-based with both goods and services leading the way higher. Headline and core CPI both came in hot confirming that the disinflation the Fed has been counting on has stalled, suggesting the Fed has probably lost its opportunity to cut rates further,” noted Steven Ricchiuto, chief economist of Mizuho Securities USA.