As companies often raise prices at the beginning of the year, the CPI tends to rise in January. However, the growth rate of core CPI in January this year hit a near five-year low. Despite continued increases in housing prices and signs of tariff impacts on consumer goods such as clothing and computers, prices in politically sensitive categories like gasoline, beef, and eggs fell. Disinflationary pressures are expected to dominate in the coming months. Goldman Sachs believes that the Federal Reserve's path to 'normalization' through interest rate cuts depends on whether employment continues to improve. They still anticipate two rate cuts this year, with the first in June. Traders expect the CPI to peak by mid-year before retreating, consistent with expectations of the first rate cut in June or July.
During the early part of the year, typically a period of rising inflation, US inflation data showed moderate growth, with the core CPI year-on-year growth rate falling to its lowest level in nearly five years, indicating continued easing of price pressures. This better-than-expected cooling in inflation boosted market expectations for the Federal Reserve to cut interest rates this year, with bond traders pushing the probability of three rate cuts within the year to 50%. Despite some sticky service-related prices, the overall data provides room for the Fed’s subsequent policy adjustments.
The Bureau of Labor Statistics (BLS) of the US Department of Labor announced on Friday the 13th that the Consumer Price Index (CPI) grew by 2.4% year-on-year in January, the lowest growth rate since May of last year, below the December growth rate of 2.7% and market expectations of 2.5%; the core CPI increased by 2.5% year-on-year in January, the lowest growth rate since March 2021. Nick Timiraos, a journalist known as the 'new Fedwire,' noted that the month-on-month increase in core CPI in January was slightly lower than some forecasts, with year-on-year growth continuing to slow.
Following the release of the CPI data, traders' expectations for total interest rate cuts this year rose from 58 basis points on Thursday to 63 basis points, implying a 50% probability of three rate cuts by the end of the year. The market anticipates a 30% chance of a rate cut in April and over an 80% likelihood of a rate cut in June.
The market reacted swiftly.
The yield on two-year U.S. Treasury notes, which are sensitive to interest rate changes, dropped by 6 basis points to 3.40% at one point, hitting a nearly two-month low since October 2025.
$XAU/USD (XAUUSD.CFD)$Breakthrough of $5000 per ounce.
$Bitcoin (BTC.CC)$Bullish sentiment drove a rebound, with prices reaching $69,000.
In the U.S. stock market, it represents small-cap stocks.$Russell 2000 Index (.RUT.US)$rose nearly 2% during intraday trading.
Price increases across the board slowed.
The CPI rose only 0.2% month-on-month in January, the smallest increase since July of last year, below expectations of 0.3%. Energy prices were the main drag, with the overall energy index falling by 1.5% and gasoline prices dropping by 3.2%. Core CPI increased by 0.3% month-on-month, meeting expectations but higher than the 0.2% in December.
Excluding housing, core services prices — or super-core CPI — increased by 0.56% month-on-month in January, the largest increase since January of last year, but the year-on-year growth slowed to 2.67%, the lowest since March 2021. This phenomenon may be related to 'residual seasonality' factors, as the month-on-month increases for January 2024 and January 2025 were the highest for the entire year.
Sub-item data showed that housing costs rose only 0.2% month-on-month in January, the smallest increase since September last year, with year-on-year growth slowing to 3%. Prices for used cars and trucks fell by 1.8%, marking the largest decline in two years. Food price increases were the smallest since July 2025, with beef and veal prices down by 0.4% and egg prices plummeting by 7%.
Some categories of goods showed signs of tariff impacts. Apparel prices rose by 0.3%, video and audio products increased by 2.2%, computers and smart home assistants rose by 3.1%, and laundry equipment climbed by 2.6%. Airfare surged by 6.5%, the largest increase since mid-2022.
Disinflationary trends are solidifying.
The Wall Street Journal noted that the easing of inflation in January alleviated market concerns that high tariffs under the Trump administration would lead to broader and sustained inflation. The report pointed out that lower overall price increases were a positive signal for the economy, although rising prices for items such as clothing, televisions, and airfare continued to show that inflation was still pressuring consumers.
The report cited analysis indicating that the latest annual data benefited from the base effect as high inflation figures from January 2025 exited the statistical window. In the final months of Powell’s term as Federal Reserve Chair, the Fed faces the delicate task of carefully balancing inflation control with protecting the labor market.
Bloomberg's report emphasized that a key indicator—the year-over-year growth rate of super-core CPI—was the slowest since March 2021. The report noted declines in politically sensitive categories such as gasoline, beef, and eggs, while housing prices continued to rise and airfare surged. Consumer goods like clothing, computers, and smart home assistants showed signs of tariff impacts.
Anna Wong and Troy Durie, economists at Bloomberg Economics, stated: 'CPI tends to rise in January because companies often increase prices at the beginning of the year. But this January, core CPI was notably lower than in previous years. While there are still some hotspots, strong disinflationary forces exist in autos, food, and energy. Overall, we believe disinflationary pressures will dominate in the coming months.'
Wall Street reevaluates rate-cut path.
Lindsay Rosner, Head of Multi-Sector Fixed Income Investments at Goldman Sachs Asset Management, said: 'The path toward the Fed’s normalization of rate cuts now appears clearer, as concerns over higher January data have faded. However, the length of this path will depend on whether employment continues to show signs of improvement. We continue to expect two rate cuts this year, with the next move likely in June.'
Tiffany Wilding, an economist at PIMCO, described the inflation report as 'quite encouraging beneath the surface.' She highlighted two positive developments: housing inflation, which had remained stable since the pandemic, was genuinely slowing; and tariff-related impacts had largely dissipated. 'As these effects fade, the Fed should feel more comfortable cutting rates. A few more rate cuts this year seem reasonable to us.'
Christopher Hodge of Natixis described the data as 'an odd mix' but said it ultimately pointed in one direction: 'In the coming months, we expect inflation to remain above ideal levels but not accelerate, allowing the Fed to cut rates in response to weak labor market data.'
Seema Shah, Chief Global Strategist at Principal Asset Management, commented: 'Inflation met expectations, but markets breathed a sigh of relief because price pressures remained contained despite very strong labor market data earlier this week and the risk of further tariff pass-through. For the Fed, however, this is still insufficient to justify near-term rate cuts. Persistent strength in the labor market provides policymakers cover to remain on hold.'
Eric Winograd, Senior U.S. Economist at AllianceBernstein, stated: "The key point is that the inflation trend before the government shutdown remains unchanged. Inflation continues to be sticky. The Federal Reserve feels comfortable maintaining (interest rates) unchanged. It is reasonable to expect they will resume rate cuts later this year, once there is clearer evidence that inflation is cooling down."
Bond market bets on faster rate cuts.
Ira Jersey, Chief U.S. Interest Rate Strategist at Bloomberg Intelligence (BI), commented: "The strong immediate bullish steepening reflects relief that the CPI did not rise higher. At the level of 2.4%, considering the gap between the CPI and the PCE deflator, this suggests the Federal Reserve's 2% target is approaching. The market may not price in earlier rate cuts, but pricing in a slightly lower terminal rate seems reasonable."
Jersey further pointed out: "The main reason for the change in short-term Treasury yields is the repricing of the endpoint of the Federal Reserve's rate cuts, rather than the timing of additional cuts. Over the past two days, the terminal rate has fallen by more than 10 basis points, indicating a high probability of another rate cut before March 2027. If the next set of data is similar to the recent ones, we believe the market will start pricing in a federal funds rate below 3%."
Ali Jaffery from CIBC Capital Markets noted that year-over-year CPI growth figures of 2.4% and 2.5% are 'largely consistent' with the Federal Reserve's preferred core inflation measure—the PCE price index—running at the 2% pace policymakers desire. Historically, the CPI has averaged about half a percentage point higher than the PCE.
Inflation swaps markets indicate that traders expect the CPI to retreat after peaking mid-year, aligning with market expectations that the Federal Reserve will begin cutting rates around June or July. The initial reaction in Treasuries eased as attention shifted to the broader implications of this week's data releases. By 9 a.m. EST, yields across all maturities fell by 1 to 2 basis points.
Aroop Chatterjee, Managing Director at Wells Fargo Securities, stated: "The absence of substantial surprises may allow the Federal Reserve to keep its focus on the labor market. The market might be overestimating the likelihood of Federal Reserve rate cuts this year."
Looking to pick stocks or analyze them? Want to know the opportunities and risks in your portfolio? For all investment-related questions,just ask Futubull AI!
Editor/Stephen
