Hot, hot, hot
Hot, hot hot
US inflation data came in hot in January with the biggest monthly rise for 18 months and that’s even before the impact of any tariffs are felt. Hot inflation renders the chances of interest rate cuts this year unlikely.
The US consumer price index (CPI) rose 0.5% in January, the most since August 2023 and well ahead of expectations. This was led by a range of household expenses like groceries and fuel as well as housing costs. Year-on-year CPI rose 3%. Core CPI (excluding often-volatile food and energy costs), climbed a little less on the month (up 0.4%), again more than forecast, but is up 3.3% year-on-year. Both of these numbers are on the rise after falling for a number of months and are well above the Federal Reserve target of 2%.
There may be a “January effect” at work. As many annual price increases occur in January there is a seasonal adjustment made to the inflation data, otherwise you would see inflation spikes every January. However, this adjustment can be hard to accurately calculate and so January inflation is often a little higher than may be expected. However, we can’t simply write off these numbers and should be wary of an upward trend in inflation.
US producer price data (PPI) released yesterday also unexpectedly ticked up, rising 3.5% year-on-year (plus earlier data was revised upwards), and together the figures are making the prospect of an interest rate cut this year by the Federal Reserve decidedly unlikely (albeit markets are still pricing in one cut by the end of the year). Some economists are already settling on no rate cuts for 2025, while a few pessimists say any more bad news may prompt the central bank to actually start raising rates again.
Inflation is creeping back up and interest rates aren’t likely to fall much further.
Source: Bloomberg, Artorius
CPI = Consumer Price Inflation. Core CPI strips out energy and food.
This is before we start to add in the potential impact of tariffs. There has been a flurry of announcement and threats, but little in the way of hard measures. In the latest iteration, President Trump instructed his advisers to draw up a set of “reciprocal” tariffs on America’s trade partners. These would be an effort to respond, on a country-by-country basis, to trade barriers faced by US exporters abroad. This will be a complicated endeavour but, if Trump follows through, the tariffs could be a much bigger deal than the other measures threatened to date.
It is hard to accurately estimate the impact on growth and inflation from any measures, given the significant uncertainty over what will actually be put in place and what the response will be from targeted countries. However, it is prudent to expect a hit to US economic growth and for inflation to be higher than it would be, were these policies not on the agenda. This negative impact on growth and inflation should detract from risk assets but there has been little sign of this so far, indeed stock markets in those countries in the tariff-crosshairs have actually been outperforming the US this year. In part, this may be down to the uncertainty around tariff policy but also reflects a wider range of factors, including lower valuations and improving earnings. Also, there have been notable sentiment improvements in China, as DeepSeek has helped stimulate renewed interest in unloved Chinese technology stocks, which have all but been ignored in the euphoria over the so-called “Magnificent 7”. Additionally, the increasing chance of a ceasefire/deal in the Russia/Ukraine conflict could significantly boost a European economy that has been hit hard by the impact of sanctions on Russia, notably through lower gas prices were the taps to be turned back on.
The end of US exceptionalism? Countries/regions targeted for tariffs are actually outperforming the US.
Source: Bloomberg, Artorius
Gareth Thomas
Head of Investment Management
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