Last month's inflation in the USA exceeded expectations across the board, supporting the Federal Reserve's cautious attitude towards interest rate cuts.

Data released by the Bureau of Labor Statistics on Wednesday showed that the core CPI, excluding food and Energy costs, accelerated to 0.4% month-on-month in January, exceeding the expected 0.3% and previous value of 0.2%; the year-on-year growth rate accelerated to 3.3%, higher than the expected 3.1% and previous value of 3.2%.

The overall CPI month-on-month growth rate accelerated to 0.5%, higher than the expected 0.3% and previous value of 0.4%, while the year-on-year growth rate returned to "three percent," at 3%, higher than the previous value and market expectation of 2.9%.

The Labor Department stated that housing costs continue to be an issue for inflation, rising 0.4% for the month and accounting for about 30% of the total CPI increase.

Fueled by a 15.2% rise in egg prices, food prices increased by 0.4%, the department noted, marking the largest increase in egg prices since June 2015, with about two-thirds of the domestic food price increases attributed to eggs. Egg prices in the USA skyrocketed by 53% over the past year.

It is worth noting that the USA Labor Department updated the weights and seasonal adjustment factors, which the government uses to remove seasonal fluctuations from the data to reflect price changes in 2024. Last month's CPI increase may partly reflect price hikes driven by businesses at the beginning of the year. Companies may have preemptively raised prices in anticipation of higher and broader tariffs on imported goods.

Core CPI rose in January, and economists indicated that this suggests that even after seasonal adjustments, seasonal effects still linger in the data.

The CPI report released on Wednesday further proves that the current anti-inflation process in the USA is at risk of reversal, combined with a strong labor market, which may cause the Federal Reserve to remain inactive in the foreseeable future. Policymakers are also waiting for US President Trump's policies to become clearer, especially regarding tariff policies, which have already led to an increase in consumer inflation expectations.

Just a day before this report was released, Federal Reserve Chairman Powell stated that regarding interest rates, the Federal Reserve may pause for a while.

Currently, traders have adjusted their expectations for the Federal Reserve's next rate cut from September to December. Interest rates futures traders currently expect the Federal Reserve to only lower rates by 26 basis points by December, down from about 37 basis points before the data was released, indicating that the Federal Reserve is likely to implement only one 25 basis point rate cut this year.

Goldman Sachs Analyst Whitney Watson stated that today’s inflation data could further solidify the Federal Reserve’s cautious easing policy path. A robust labor market also provides the Federal Reserve the space to remain patient. He said, 'We believe that the Federal Reserve is likely to maintain a wait-and-see approach and will keep interest rates unchanged at next month’s meeting.'

Michael Brown, an Analyst from Pepperstone, stated that currently, the possibility of the Fed reducing Interest Rates in the first half of 2025 seems very low. He mentioned:

"For the FOMC, the January CPI data from the USA will be a critical data point, although it is likely to be influenced by one-time factors, such as typical significant price increases that often occur at the beginning of the year. Given that this data suggests progress in curbing inflation has stalled, the possibility of a longer pause in the easing cycle has now increased."

Earlier, Trump also called on Social Media for the Federal Reserve to lower interest rates, which would go hand in hand with the upcoming tariff policies. Given the 'sky-high' CPI data, it can be anticipated that a 'tense period' is about to begin between the Federal Reserve and the White House.

Peter Cardillo, chief market economist at Spartan Capital Securities in New York, pointed out, 'If this situation continues for another month or two, it could mean that the Federal Reserve may keep interest rates unchanged for the remainder of the year. Powell has clearly stated that they will stick to their dual mandate and will not be bullied by any politicians. Trump is powerless, will he pressure the Federal Reserve? Yes. But will the Federal Reserve concede? No.'

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