Inflation Rises at Fastest Pace in 1.5 Years: What it Means for 2025 Fed Rate Cuts
The January CPI numbers revealed that inflation rose 3% year-over-year, likely putting the brakes on any near-term rate cuts from the Federal Reserve.
Inflation is heating up again, casting doubt on hopes for Federal Reserve rate cuts in 2025. Fresh data from the Bureau of Labor Statistics (BLS) shows consumer prices climbing at the fastest pace in a year and a half, signaling that the battle against inflation is far from over. This unexpected spike has Wall Street recalibrating expectations, with traders now betting on fewer if any, rate cuts this year.
Inflation Pressures Mount
The latest Consumer Price Index (CPI) report revealed a 3% year-over-year increase in January, above the analysts’ projection of 2.9% and up from 2.9% in December.
Prices rose 0.5% monthly, the biggest gain since August 2023 and above the analyst forecast of 0.3%. Excluding food and energy, core inflation advanced 0.4%, marking the sharpest rise since March.
Scott Anderson, the chief US economist at BMO Capital Markets, commented:
“The moderation we saw in consumer inflation last summer is no longer visible now. The problem for the Fed is this isn’t just a one-month event but looks like a real multi-month firming of inflation pressures.”
What are the culprits behind the surge? Shelter, food, and gasoline. Housing costs, which account for nearly a third of the CPI, rose 0.4% in January. Egg prices soared 15.2%—the biggest jump since June 2015—amid an avian flu outbreak that led to supply shortages. Gasoline prices also climbed 1.8%, adding to consumer pain at the pump.
Fed’s Rate-Cut Timeline in Question
Investors and economists had hoped the Federal Reserve would start cutting interest rates by mid-2025, but those expectations are fading fast. Before the inflation report, traders priced in at least two quarter-point rate cuts this year. Now, market bets have shifted toward just one cut, with some analysts predicting the Fed may stay on hold altogether.
Sameer Samana, head of global equities and real assets at Wells Fargo (NYSE: WFC) Investment Institute, stated:
“The hotter-than-expected CPI confirms investors’ anxiety regarding too-hot inflation that will keep the Fed on the sidelines.”
Federal Reserve Chair Jerome Powell reinforced that sentiment in his latest testimony to Congress, clarifying that the central bank isn’t in a rush to cut rates.
Powell said:
“People can be confident that we’ll continue to keep our heads down, do our work, and make our decisions based on what’s happening in the economy.”
Market Reaction: Stocks Slide, Treasury Yields Spike
The inflation surprise sent shockwaves through financial markets. Stocks stumbled, with the Dow Jones Industrial Average (DJI) falling 0.5% and the S&P 500 (SPX) shedding 0.27%. The NASDAQ Composite (IXIC) managed to eke out a slight gain of 0.31%.
Some companies bucked the trend. Gilead Sciences (NASDAQ: GILD) jumped 7.46% after reporting stronger-than-expected profits, while CVS Health (NYSE: CVS) surged 14.95% following upbeat earnings. However, ride-hailing giant Lyft (NASDAQ: LYFT) tumbled 7.92% despite beating profit estimates, as revenue fell short of expectations.
Homebuilders and housing-related stocks took a hit, reflecting concerns that persistent inflation will keep mortgage rates elevated. Home Depot (NYSE: HD) slid 2.21%, Builders FirstSource (NYSE: BLDR) dropped 3.46%, and Lennar (NYSE: LEN) declined 2.66%.
Energy stocks also struggled as oil prices dipped. Exxon Mobil (NYSE: XOM) fell 3% after crude oil prices dropped following news of potential peace negotiations in Ukraine. Meanwhile, airline stocks saw turbulence, with Frontier Group (NASDAQ: ULCC) losing 4.93% after Spirit Airlines (OTC: SAVEQ), which plummeted 20.66%, rejected yet another takeover bid.
The Path Forward
With inflation still running hot and the labor market holding firm, the Fed’s path to rate cuts appears more complicated than it did just a few months ago. Adding to the uncertainty, potential tariffs from the Trump administration could further stoke inflation later in the year. Analysts warn that these trade policies could drive up prices for imported goods, making the Fed’s job even harder.
Gregory Daco, chief economist at EY-Parthenon, warned:
“The risk is tilted toward less easing if the administration’s policy mix fuels inflation and inflation expectations.”
For now, all eyes are on upcoming inflation reports and the Federal Reserve’s next policy moves. If inflation remains sticky, rate-cut hopes for 2025 could continue to dwindle, keeping borrowing costs elevated for businesses and consumers alike.
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