The first CPI report for 2025 in the United States came in with a little more heat than anticipated. January saw a 0.5% rise in headline inflation, following a 0.4% increase in December. This shift nudged the year-over-year rate up to 3.0% from 2.9%.
Zooming in on core CPI—which excludes the often fluctuating food and energy costs—there was a 0.4% monthly rise and a 3.3% increase year-over-year. This indicates that underlying price pressures remain persistent.
If you want to dive deeper, you can view the official U.S. CPI Report for January 2025 here.
The report provides insights into what might have fueled January’s inflation bump:
- Shelter costs increased by 0.4%, contributing significantly to the monthly rise.
- Energy prices surged by 1.1%, driven largely by a 1.8% hike in gasoline prices.
- Food prices edged up by 0.4%; notably, egg prices soared by a striking 15.2%.
- Auto insurance premiums spiked by 2.0%.
- Increases were also seen in medical care and airline fares.
In a session with lawmakers, Fed Chair Powell acknowledged “substantial progress” on inflation but clarified that they’re “not quite there yet,” signaling that restrictive monetary policy remains necessary for the time being.
The unexpectedly strong report caught the markets by surprise, representing the largest monthly increase since August 2023. Economists had forecasted a more modest 0.3% rise. This unforeseen leap caused market participants to reassess their interest rate forecasts.
The CME FedWatch Tool indicated a sharp decline in expectations for a rate cut this year. Markets adjusted their predictions from two cuts to just one.
In light of these developments, the U.S. dollar had an eventful day against major currencies. Initially, the stronger inflation figures posed another challenge for the Fed, as it weighs its next steps in potentially easing policy, leaving investors uncertain about the timing of the first rate cut.
The surprisingly robust CPI report triggered a notable rally in the U.S. dollar, marking perhaps one of its most significant surges in months. USD/JPY took the lead, potentially achieving its largest daily gain since December. However, the dollar rally was short-lived.
Analysts pointed out that January is commonly associated with seasonal price increases, prompting market participants to question if this inflation surge was more of an anomaly than a sustained trend. This set the stage for profit-taking and position adjustments, particularly in pairs like EUR/USD, which likely recouped some of their initial losses as these trades unfolded.
USD/JPY stood apart, maintaining most of its gains. Yield differentials may have continued to bolster this pair, even as other dollar pairings reversed amid increasing doubts over the significance of January’s hotter inflation data.
