January CPI Hotter Than Expected
The CPI inflation report for January came in much hotter than expected, but there were enough oddities in the details to argue for a more balanced interpretation.
Weekly Highlights
Highest since June
Nearly unchanged since June
Wildfires, cold weather, hit.
Lower than expected
Details were not great
Above expectations
Remains subdued
Above expectations
Picking up; rate cut is in the air.
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US: Inflation Ebb and Flow
The CPI inflation report for January came in much hotter than expected, but there were enough oddities in the details to argue for a more balanced interpretation. First, the bad news: overall prices rose 0.5% m/m, with core prices (excluding food and energy) up 0.4% m/m. This lifted the two respective inflation rates by a tenth each to 3.0% y/y and 3.3% y/y. The market’s response was sharp and swift, with 10-year yields up nearly 15 basis points immediately following the release.
But the details told a more nuanced story. Food prices rose 0.4% m/m, with food at home up 0.5%. There were no obvious outliers aside from the surge in egg prices amid avian flu-related shortages. Energy, however, surprised meaningfully to the upside with a 1.1% monthly gain; cold weather, natural disasters, and seemingly lingering seasonal effects all played a role. New car prices were flat but used car prices jumped 2.2%. On a y/y basis, used car prices have now essentially caught up with changes in the Manheim auction price series, so unless the latter steps up from here, monthly increases of this magnitude in used car CPI are unlikely. Motor vehicle insurance also reaccelerated following a couple of tamer reads: insurance costs jumped 2.0% m/m, the most since March 2024. Notably, parking fees surged 6.4% m/m, suggesting a start of year price hike that may or may not have been exacerbated by seasonal effects. Given the y/y gain is just 4.8%, the January increase appears disproportionate and indicative of seasonal effect distortions; but stricter return to office mandates are also creating more demand so the effects could be more lasting. In recreation services, seasonal effects likely made the data look worse than it was: the outsized increases across several categories were hard to explain. Medical services offered a favorable counterpoint. The shelter component was OK. Overall shelter costs increased 0.4% m/m, but rent of primary residence matched December’s 0.3% rise. Lodging away from home posted a big 1.4% m/m gain, but that seems bound to ease.
The slow but steady moderation in rent of shelter inflation (from 6.1% y/y in January 2024 to 4.4% in January 2025) is an important reminder that there is a lot more to US inflation than just goods and tariffs. The producer price inflation data reinforced that point. Despite an upside surprise on the headline, PPI components used in the calculation of PCE (personal consumption expenditure) inflation were on the soft side. We’ve been making the point for a while now that, even with an elevated January gain, the y/y increase in core PCE inflation is bound to moderate by two tenths to 2.6% y/y. That remains our forecast, but the PPI release opens the door to a three tenth decline to 2.5% y/y. Any retreat would be good news insofar as it would mark the first y/y improvement in this inflation metric (the Fed’s preferred measure) since June. If not for tariffs, this could have kept March as a live meeting for a cut.
The notable miss in retail sales was another reminder that the FOMC needs to weigh both inflation and growth risks. Nominal sales dropped 0.9% m/m, although a little of this sting was offset by an upward revision. However, control sales (excluding food, gas, building materials, and dollar stores) dropped 0.8%, practically unwinding December’s gain. Wildfires and cold weather weighed on these results, but it remains to be seen how durable the rebound will be given likely hit to consumer confidence from tariffs and return to office requirements for federal employees.
UK: Muted Growth
Q4 real GDP growth was better than expected but the details weren't great. After stagnating in Q3, the UK economy grew 0.1% in Q4 thanks to a surge in inventories and government consumption. But household expenditures, net trade, and business investments—the components most relevant to the underlying health of the economy—were either flat or contracted.
After gaining some traction earlier last year, household consumption was flat in Q4. The household savings rate stood at an elevated level 9.7% in Q3 despite strong recovery in household disposable income. On one hand, real wage growth is likely to remain positive given the boost from government spending, which will modestly support consumption. On the other hand, higher interest rates and weaker labor market will likely continue to weigh on household consumption this year.
At the same time, higher taxes from the October Budget have affected business sentiment and investments. Business investment fell 3.2% q/q, after a decent growth in Q2 and Q3. Residential investment was also down by 0.8% q/q. Leading indicators such as the PMIs also pointed to softer private sector activity.
Overall, the economic activity for the first half of 2025 is likely to be more muted than we expected. Last week, the BoE decided to lower policy rate by 25 bps to 4.50% and showed further signs that rate cuts might be deeper than market expected. The bank also halved its 2025 GDP growth forecast from 1.5% to 0.75%. While the bank still tied to gradual approach due to its concern on weak supply-side, we continue to see that the bank rate will reach 3.5% by end of this year.
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Australia: Subdued Sentiment
What to expect beyond the next week’s rate cut: Can Australia Survive A Trade War?
Consumer sentiment was subdued in February, as small gains across a few sub-components were offset by worsening perceptions of current family finances. Sentiment rose a touch to 92.2, with Westpac noting a stalled recovery in the last three months. The weaker assessments of current conditions may be indicative that household consumption may have gained only modestly from the energy subsidies. However, considering that a rate cut is on the horizon, sentiment may pick up strongly over the next month.
January’s NAB Business Survey data moved little in the context of recent trends. The conditions index eased three points to 3, close to the weakest reading in three years. Furthermore, sub-indices measuring trading conditions and profitability are near their lowest levels in five years. At the same time, modest improvements were registered in employment and retail prices (although purchase costs eased). These data are consistent with the view that the economic activity remains subdued, with consumption likely having picked up only modestly in Q4.
However, this comes against the backdrop of inflation easing into the target, and will help the Reserve Bank of Australia (RBA) deliver their first rate cut next week.
Incoming data will be vital for further cuts. The labor market remains strong, with month to month employment growth becoming very difficult to predict of late. January is the most seasonal month of a calendar year, and we note that the unadjusted employment growth had declined in every January in the last two decades. We expect the seasonally adjusted employment to have risen modestly by 10k last month, led by a reversal in the full-time category. The unemployment rate may have edged up a touch to 4.2%, near the same level where it was in January 2024.