15 January 2025
If you are covering the latest US CPI figures, please see the following comment from Lindsay James, investment strategist at Quilter Investors:
"US CPI has been published, with the annual headline figure rising as expected to 2.9% from 2.7%, driven by higher energy costs, whilst core inflation declined marginally to 3.2% from 3.3%, a slightly better than anticipated result. The core monthly rate fell slightly from 0.3% to 0.2%, the first step down in five months.
"Investors were expecting to see signs of rising inflation, given inflation expectations have been building, both from consumers, investors and the Federal Reserve. Since September, Treasury breakeven rates; the difference between the Treasury rate and the inflation-index rate, which is one measure of average expected inflation over that period, have been rising. For 2-year Treasuries, this breakeven rate has gone from a low of 1.8% in September up to 2.55%, explaining almost fully the 75bp rise in 2-year bond yield moves. However, whilst higher expected inflation has certainly played a part in rising long term bond yields, bigger factors have been involved such as Donald Trumps promised tax cuts which are driving up the fiscal deficit and implying high levels of bond issuance in years to come.
"Whilst the threat of tariffs is likely already seeing US supply chains de-risked accordingly, with cost and price implications, tariffs may not be as inflationary as some believe. They are generally a one-off price adjustment and likely to be highly targeted given universal tariffs remove the opportunity to negotiate on a transactional basis as well as often being neutralised by currency adjustments, offsetting any advantage to competitiveness. However, Trump’s immigration stance may have a more significant impact on inflation, with shelter costs still a major component of price rises and the construction industry heavily reliant on migrant labour at a time when housing supply is already struggling to match demand.
"Ahead of the CPI release, investors expected only one further interest rate cut in the year. These figures imply that at present, resurgent headline inflation is primarily stemming from energy costs and not re-igniting more broadly within the economy. This should see expectations for rate cuts at worst maintained for the year ahead, with perhaps marginally more optimism than before."
