The US CPI in January increased less than expected! Market expectations for interest rate cuts are rising, but the stabilizing job market may lead the Federal Reserve to continue to adopt a wait-and-see approach.

Data released on Friday showed that the US January CPI rose by 2.4% year-on-year, lower than market expectations of 2.5% and the previous value of 2.7%; month-on-month, it rose by 0.2%, below market expectations of 0.3% and the previous value of 0.3%. Excluding volatile items such as food and energy, the core CPI rose by 2.5% year-on-year, in line with market expectations, lower than the previous value of 2.6%; month-on-month, it rose by 0.3%, also in line with market expectations, higher than the previous value of 0.2%. Although the overall inflation slowdown was better than market expectations, core inflation remained stubborn, coupled with a stabilizing labor market, which may lead the Fed to maintain interest rates unchanged for a period of time. Analysts pointed out that the overall CPI increase in January in the US was lower than expected, mainly due to the impact of higher base effects from last year. In addition, core CPI data in January each year often exceeds expectations, as the labor bureau model does not fully account for one-time price increases at the beginning of the year. This CPI data may also reflect both this early-year effect and the transmission impact of Trump's broad tariffs. Economists expect that inflation may rise temporarily during the year due to the transmission of import tariffs and the depreciation of the US dollar last year. It is worth noting that service industry inflation has risen significantly. Excluding housing, the core service industry inflation rate rose by 0.56% month-on-month, the largest increase since January of last year. However, even with a significant increase in core service industry inflation month-on-month, the year-on-year increase fell to 2.67%, the lowest level since March 2021. This is likely an important reason why the year-on-year increase in core CPI in January fell from 2.6% to 2.5%, hitting a new low since March 2021. Following the release of this latest inflation data, the US dollar fell sharply in the short term, spot gold rose over $20 in the short term, and the futures of the three major US stock indexes turned higher. US bond yields fell - the 10-year US bond yield fell by 3.3 basis points to 4.071%; the interest rate on the 2-year US bond, sensitive to monetary policy, fell by 2.3 basis points to 3.443%. In addition, following the release of the CPI data in January, the expected rate cut by the Federal Reserve in 2026 has risen to 61 basis points, compared to just 58 basis points previously. The market currently believes that there is a 30% probability of a rate cut by the Fed before April, while the likelihood of a rate cut before June exceeds 80%. Analyst Adam Button pointed out that following the release of the CPI data, the market's pricing of the Fed has slightly shifted towards dovishness, leading to a weaker US dollar and the S&P 500 index futures erasing earlier losses. However, it is worth noting that due to the government shutdown resulting in missing CPI data for October and delayed data collection start for November, covering more seasonal holiday discounts. Economists widely warn that these disruption factors may artificially lower the readings. Lindsay Rosner, Head of Multi-Sector Fixed Income Investments at Goldman Sachs Asset Management, said that since the January CPI data was not as strong as feared, the Fed's "normalization" rate cut path seems clearer. This will depend on whether there continue to be signs of improvement in the labor market, as the Federal Open Market Committee (FOMC) is highly sensitive to the weakness of the labor market. She still expects the Fed to cut rates twice this year, with the next rate cut taking place in June.