Last week’s consumer and producer price reports reignited concerns surrounding inflation given stronger than expected readings from both releases. For headline CPI, year-over-year inflation accelerated to 3.0%, from 2.9% in the prior month, while core inflation accelerated to 3.3% from 3.2%. Meanwhile, reaccelerating producer prices suggest that the risk is tilted away from a resumption of the downtrend in inflation that has taken place over the past couple of years.

There is some risk that inflation could climb even higher from here, given recent U.S. government actions and a resurgence of goods prices. However, a meaningful rise seems unlikely due to ongoing downward pressure stemming from disinflation in the shelter and services components of the CPI basket. As a result, the more likely scenario is for inflation to remain sticky at the 3%-4% range over the coming months.

Also last week, Chairman Powell’s testimony to Congress echoed his message at the January FOMC press conference with a nod to the strong economy and a lack of urgency in reducing the funds rate. Expectations for interest rates have shifted with the timeline for rate cuts pushed out to later in the year – Fed funds futures are fully pricing in an October or December rate cut. As a result, it will likely be difficult for Treasury yields to decline markedly given the muted expectations for rate action from the Fed.

The downturn in CPI inflation has taken a pause 

• The January report for CPI revealed a faster-than-expected 3.0%, year-over-year, inflation rate, up from 2.9% in December. On a month-over-month basis, the CPI increased 0.5%, which was the largest jump since August 2023. Core CPI (which exludes food and energy prices) rose 0.4% month-over-month, lifting the annual inflation rate to 3.3% – higher than the expected rate of 3.1%.

• One of the most notable jumps in the CPI report was the 53% rise in the price of eggs. Egg supplies have been diminished as a result of the avian flu and the resulting slaughter of chickens throughout U.S. farms. Meanwhile, the prices for several items in the CPI basket have also been growing at a fast pace such as car insurance, frozen juices, postage & delivery services, and air fares.

Producer prices suggest inflationary pressure hasn’t abated

• Producer prices (PPI) rose 0.4% month-over-month, and 3.5% over the past year. PPI showed a 44% jump in egg prices from a month earlier helping to push food prices up by 1.1% over the same time period. Energy also rose smartly, rising by 1.7%, m-o-m. Overall, the upward trend in these wholesale prices should harden the floor under consumer prices in the coming months.

• Are we headed for a more troubling inflation scenario? Afterall, the recent actions of the U.S. government including tariffs and deportations are arguably inflationary.

• However, the more likely path for is for inflation to settle in the 3% to 4% range over the next few months. The primary support for this thesis is due to one of its biggest components, owners’ equivalent rent, which makes up a 27% weight in the CPI basket. Gauges of rent are deflating, and this should continue to feed through into the CPI measure. 

• Furthermore, the inflation in services, a 61% weight in the CPI basket, is closely tied with wage pressures and wage inflation continues to moderate. 

Expectations for rate cuts in 2025 have been muted

• The inflation reports from last week bolsters Chairman Powell's recent message to Congress in which he noted that economic activity continues to expand at a solid pace, helped by the strength of consumer spending. While inflation has trended lower, it remains above the Fed's 2% longer-run goal. Also, given the strong economy, the Fed is likely not in any hurry to reduce interest rates in the next couple of meetings. 

• Based on Fed funds futures, the next rate cut is likely not until the October 29 or December 10 FOMC meeting. Meanwhile, it will likely be difficult for Treasury yields to decline markedly given the muted expectations for rate action from the Fed. 

High Frequency Data Tracker

N.B. The charts in the following pages are as of February 14, 2025, unless otherwise noted.

Economics

Equities

Fixed Income

Currencies

Commodities