Macroeconomics

Inflation challenges the Fed again

13 February 2025 • 4 mins read

Federal Reserve Chair Jerome Powell. AFP.

January’s US consumer price index (CPI) inflation rate surprisingly increased, making it harder for the Federal Reserve to keep cutting interest rates.
Last month, consumer prices gained 0.5%, lifting headline inflation back to 3.0%. Excluding food and energy, prices still rose 0.4%, boosting core inflation to 3.3%, well above the Fed’s 2% target.
January’s unexpected inflation rate was driven by volatile items including used cars, hotels, vehicle insurance and public transport. But underlying price pressures continue to be stubbornly high too.
We expect only one last 25bps rate cut this year before the Fed keeps its fed funds rate at 4.00-4.25% to continue curbing inflation. Bond yields are set to stay elevated and 10Y Treasuries may hit 5.00%.

January’s US consumer price index (CPI) inflation rate surprisingly rose again, making it harder for the Federal Reserve to keep cutting interest rates further.

Source: Bank of Singapore, Bloomberg

Last month, consumer prices increased 0.5%, lifting headline inflation back to 3.0% as the chart above shows. Excluding food and energy costs, underlying prices still rose 0.4%, boosting core inflation to 3.3%, well above the Fed’s 2% target.

January’s unexpectedly firm inflation rate was driven by volatile items. Used cars jumped 2.2%, lodging away from home including hotels increased 1.7%, public transport rose 0.7% and motor vehicle insurance was 2.0% higher last month. But underlying price pressures continue to be stubbornly high too.

Source: Bank of Singapore, Bloomberg

The chart above shows a breakdown of core inflation into goods and more persistent services costs. Services inflation is falling after surging in the pandemic but at 4.3% remains above its pre-2020 range of 2-3%.

Source: Bank of Singapore, Bloomberg

The last chart shows services inflation is being driven by high rents, rising 0.3% last month and more than 4.0% over the past year. But even excluding rents, core services costs still gained 0.8% in January, the highest monthly increase for a year.

Thus, given inflation remains above its 2% target, we expect the Fed will only make one last 25bps rate cut this year before leaving its fed funds rate at 4.00-4.25%. Bond yields are likely to stay elevated and 10Y Treasuries may reach 5.00%. We therefore stay cautious on duration for fixed income assets.

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Author:

Mansoor Mohi-uddin

Bank of Singapore