Inflation Rises More Than Expected In January, Chills Interest Rate Cut Hopes

Price pressures surged more than expected in the first month of the year, fueled by increases in both energy goods and underlying service items, dampening investor expectations for Federal Reserve interest rate cuts.

The headline Consumer Price Index rose to 3% year-over-year in data released Wednesday, up 0.1 percentage points compared to December and above median economist forecasts of 2.9%, as tracked by TradingEconomics. On a monthly basis, inflation grew by 0.5%, sharply outpacing expectations of 0.3% and accelerating from December’s 0.4% gain.

This marks the highest monthly inflation rate since August 2023.

Core inflation, which excludes volatile food and energy prices, inched up from 3.2% to 3.3% year-over-year. On a monthly basis, core inflation rose 0.4%, surprising estimates of 0.3% and outrunning December’s 0.2% increase.

Prior to the January inflation report, markets had fully priced in just one rate cut by the end of the year, while the probability of two reductions by December 2025 stands at about 42%, as per the CME FedWatch tool.

“The index for shelter rose 0.4 percent in January, accounting for nearly 30 percent of the monthly all
items increase,” the Bureau of Labor Statistics indicated Wednesday.

Fuel oil rose by 6.2% on the month, recording the highest monthly increase among CPI items.

On Wednesday, President Donald Trump reaffirmed his stance that interest rates should be reduced, indicating this move would align with tariff policies.

Fed Chair Jerome Powell is set to testify before the Committee on Financial Services later on Wednesday.

Inflation measure	January 2025	December 2024	Expectations
CPI YoY	3.0%	2.9%	2.9%
CPI MoM	0.5%	0.4%	0.3%
Core CPI YoY	3.3%	3.2%	3.1%
Core CPI MoM	0.4%	0.2%	0.3%

Market Reactions

The U.S. dollar index, which is tracked by the Invesco DB USD Index Bullish Fund ETF UUP, rallied 0.5% shortly after the release.

Treasury yields rose, with the 10-year yield up by 9 basis points to 4.63%.

Gold, as tracked by the SPDR Gold Trust GLD, tanked by 1%, along with futures on major U.S. indices.

Contracts on the S&P 500 index, which is closely tracked by the SPDR S&P 500 ETF Trust SPY, were down 1.1% by 8:37 a.m. ET.

Bitcoin BTC/USD plummeted 2% to below $95,000.

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