How does Wall Street view January CPI? Inflation concerns temporarily eased, probability of three interest rate cuts this year increased to 50%.

In the early period of the year when inflation usually picks up, inflation data in the United States has grown mildly, with the year-on-year growth rate of core CPI falling to the lowest level in nearly five years, indicating continued easing of price pressure. This unexpected cooling of inflation has boosted market expectations for the Federal Reserve to cut interest rates this year, with bond traders raising the probability of three rate cuts within the year to fifty percent. Although some service prices still show stickiness, overall data provide room for further policy adjustments by the Federal Reserve. The Bureau of Labor Statistics (BLS) of the United States announced on Friday the 13th that the CPI in January increased by 2.4% year-on-year, the lowest growth rate since May last year, lower than the 2.7% growth in December and the market expectation of 2.5%; the core CPI in January increased by 2.5% year-on-year, the lowest growth rate since March 2021. Nick Timiraos, a journalist known as the "new Fed communications agency," pointed out that the month-on-month increase in core CPI in January was slightly lower than some expectations, and the year-on-year growth rate continued to slow down. After the CPI data was released, US stock futures rose, US bond prices turned higher, yields flattened, and the US dollar declined. The yield on the two-year US Treasuries, sensitive to interest rates, once fell by 6 basis points to 3.40%, hitting a new low in nearly two months since October 2025. Following the release of the CPI data, the total expected rate cuts for this year rose from 58 basis points on Thursday to 63 basis points, equivalent to a fifty percent chance of three rate cuts before the end of the year. The probability of a rate cut in April is 30%, and the probability of a rate cut in June exceeds 80%. Two days before the release of this mild CPI inflation report, January non-farm payrolls data, which exceeded expectations, were just released, and are expected to support the Federal Reserve's current wait-and-see stance. The media pointed out that prices often rise in January due to companies raising prices at the beginning of the year, but this January's prices were much lower than in previous years, indicating that forces against inflation are prevailing. Comprehensive slowdown in price increases The month-on-month increase in the CPI in January was only 0.2%, the smallest increase since July last year, lower than the expected 0.3%. Energy prices were a major drag, with the overall energy index falling by 1.5%, and gasoline prices falling by 3.2%. The core CPI increased by 0.3% month-on-month, in line with expectations but higher than the 0.2% in December. Excluding housing, core services prices - the super core CPI - increased by 0.56% in January, the highest increase since January last year, but the year-on-year growth rate slowed to 2.67%, the lowest since March 2021. This phenomenon may be related to residual seasonal factors, as the month-on-month growth rates in January 2024 and 2025 were the highest of the year. Sub-item data showed that housing costs in January rose by only 0.2% month-on-month, the slowest increase since September last year, and the year-on-year growth rate slowed to 3%. Prices of used cars and trucks fell by 1.8%, the largest drop in two years. Food prices saw the smallest increase since July 2025, with beef and veal prices falling by 0.4% and egg prices plunging by 7%. Some categories of goods showed signs of tariff impact. Clothing prices rose by 0.3%, and prices of video and audio products rose by 2.2%, computers and smart home assistants rose by 3.1%, and washing machines rose by 2.6%. Airfare prices surged by 6.5%, the largest increase since mid-2022. Reinforcement of disinflation trend The Wall Street Journal believes that the mild cooling of inflation in January has eased concerns in the market about the high tariffs imposed by the Trump administration leading to sustained inflation. Its report pointed out that the lower overall price increases are a positive signal for the economy, although price increases in items such as clothing, TVs, and airfare still indicate continued inflationary pressure on consumers. Analyses cited in the report indicate that the latest annual data benefited from the base effects of high inflationary data in January 2025 exiting the statistical range. In the final months of Powell's tenure as Fed Chairman, the Federal Reserve faces a delicate task of carefully balancing between curbing inflation and protecting the labor market. Bloomberg emphasized that a key indicator - the year-on-year growth rate of the super core CPI - is the slowest since March 2021. The report noted that prices in politically sensitive categories such as gasoline, beef, and eggs fell, but housing prices continued to rise, and airfare prices surged. Consumer goods such as clothing, computers, and smart home assistants showed signs of tariff impact. Economists Anna Wong and Troy Durie of Bloomberg Economics Research stated, "The CPI usually rises in January as companies often raise prices at the beginning of the year. However, core CPI in January was significantly lower than in previous years. Although there are still some hot spots, cars, food, and energy exhibit strong disinflationary forces. Overall, we believe disinflationary pressures will dominate in the coming months." Wall Street reassesses rate-cut path Lindsay Rosner, Head of Fixed Income Investments for multiple departments at Goldman Sachs Asset Management, said, "The path for the Fed 'normalizing' rate cuts now looks clearer, with the concerns about rising data in January becoming a thing of the past. However, the length of this path will depend on whether employment continues to show signs of improvement. We still expect two rate cuts this year, with the next action likely in June." Tiffany Wilding, an economist at PIMCO, stated that the inflation report is "fairly encouraging beneath the surface." She pointed out two positive developments: the housing inflation that has remained stable since the pandemic is truly slowing down; and the impact related to tariffs is fading away. "As this impact fades, the Fed should be more confident in reducing rates. It seems reasonable for there to be several more rate cuts this year," she added. Christopher Hodge of Natixis described the data as a "peculiar mix," but ultimately pointing in one direction: "In the coming months, we expect inflation to continue to be above the desired level but not accelerate, allowing the Fed to cut rates to address soft labor market data." Seema Shah, Chief Global Strategist at Principal Asset Management, said, "Inflation is in line with expectations, but the market can breathe a sigh of relief because despite the very strong labor market data earlier this week and the risks of further tariff pass-through, price pressures remain subdued. However, for the Fed, this is still not enough to prove that a recent rate cut is reasonable. The continued strength of the labor market provides cover for policymakers to maintain the current stance." Eric Winograd, Senior US Economist at AllianceBernstein, said, "The real point is that the inflation trend before the government shutdown remains unchanged. Inflation still has stickiness. The Fed is comfortable with keeping rates unchanged. It is reasonable to expect them to resume rate cuts later this year once there is more concrete evidence that inflation is cooling down." Bond market betting on accelerated rate cuts Ira Jersey, Chief US Interest Rate Strategist at Bloomberg Intelligence (BI), commented, "The strong immediate steepening of rate changes in the bond market reflects relief that consumer prices did not increase significantly. At 2.4%, considering the gap between the CPI and the PCE trimmed index, this suggests the Fed's 2% target is getting closer. The market may not be pricing in earlier rate cuts, but it seems reasonable to price in slightly lower terminal rates." Jersey further pointed out, "The main reason for the changes in short-term bond yields is the repricing of the endpoint for Fed rate cuts, rather than the timing of additional rate cuts. Over the past two days, terminal rates have fallen by more than 10 basis points, indicating a high likelihood of another rate cut before March 2027. If the next set of data is similar to recent data, we believe the market will begin to price in a federal funds rate below 3%." Ali Jaffery of CIBC Capital Markets pointed out that the 2.4% and 2.5% year-on-year growth rates of the CPI are "basically consistent" with the main inflation measure favored by the Fed - the PCE price index running at the policymakers' expected 2% pace. Historically, the CPI has averaged about half a percentage point higher than the PCE. Inflation swap market shows that traders expect the CPI to peak in the middle of the year and then decline, which is consistent with the market's expectation that the Fed will start cutting rates around June or July. The initial reaction of the bond market weakened after attention shifted to the broader impact of this week's data releases. At 9 am Eastern Time, yields on various tenors fell by 1 to 2 basis points. Aroop Chatterjee, Managing Director at Fuji Securities, said, "The lack of substantive surprises may keep the Fed focused on the labor market. The market may have overestimated the likelihood of the Fed cutting rates this year."