Treasury yields jumped higher on January’s hotter than expected CPI release. The acceleration in monthly headline and core CPI readings increases the probability that the Federal Reserve (Fed) will remain on hold for a large part of 2025. Markets have pushed back interest rate cut expectations into the 4th quarter, reducing expectations to only one cut in 2025.

While this reading came in significantly higher than markets expected, it should be noted that inflation typically comes in higher near the beginning of the year as businesses reset prices. Seasonal adjustments typically don’t fully account for this bump up in pricing. From a portfolio management perspective, it’s important not to overreact to a single month’s data. Over the next few months, we’ll continue to monitor the strength of the U.S. consumer and how that is flowing through into inflation expectations.

Headline CPI increased 0.5% m/m, well above the 0.3% m/m expectation. This was the third consecutive monthly acceleration in headline CPI. It’s concerning that a large part of this increase was driven by household expenses such as groceries and gas, with shelter comprising 30% of the monthly advance. Egg prices accounted for two-thirds of the increase in grocery prices this month, reflecting the impact of bird flu. Core CPI also came in hotter than expected at 0.4% m/m, up from 0.2% m/m last month (+0.3% m/m expected by markets). Transportation services had a noteworthy increase this month, with car and truck insurance costs rising sharply.