How does Wall Street view January's CPI? Inflation concerns have temporarily eased, and the probability of three rate cuts this year has risen to 50 percent.

How does Wall Street view January's CPI? Inflation concerns have temporarily eased, and the probability of three rate cuts this year has risen to 50 percent.

In the early months of the year when inflation usually heats up, US inflation data has instead grown moderately, with core CPI year-on-year growth slowing to its lowest level in nearly five years, indicating continued relief from price pressures. This unexpectedly soft inflation report has boosted market expectations for Fed rate cuts this year, with bond market traders raising the odds of three rate cuts within the year to 50%. Although some service prices remain sticky, the overall data gives the Fed room for subsequent policy adjustments.

The US Bureau of Labor Statistics (BLS) released data on Friday the 13th, showing CPI in January increased 2.4% year-on-year, the lowest rate since last May, and below December's 2.7% and the market expectation of 2.5%. Core CPI in January rose 2.5% year-on-year, the lowest rate since March 2021. Nick Timiraos, known as the "new Fed journalist," pointed out that the month-on-month increase in January's core CPI was slightly below some forecasts, and year-on-year growth has continued to slow.

After the CPI data release, US stock futures rose, US Treasury prices turned positive and yields dropped, and the dollar weakened. The yield on the rate-sensitive two-year Treasury fell by 6 basis points to 3.40%, hitting a nearly two-month low since October 2025.

Following the CPI report, traders' expected total rate cuts this year rose from 58 basis points on Thursday to 63 basis points, equating to a 50% chance of three rate cuts by year-end. The market pegs the probability of a rate cut in April at 30% and over 80% for June.

This moderate CPI inflation report comes two days after stronger-than-expected January nonfarm payroll data, which should support the Fed keeping its current wait-and-see stance. Media pointed out that January CPI often rises due to companies raising prices at the start of the year, yet January's CPI this year was far below previous years, showing disinflationary forces are dominant.

Price Increases Slow Across the Board

January CPI grew only 0.2% month-on-month, the smallest gain since last July and below the forecast of 0.3%. Energy prices were the primary drag, with the overall energy index down 1.5% and gasoline prices declining 3.2%. Core CPI rose 0.3% month-on-month, in line with expectations but higher than December's 0.2%.

Core services prices excluding housing—i.e. super core CPI—rose 0.56% month-on-month in January, the fastest rate since last January, but annual growth slowed to 2.67%, the slowest since March 2021. This may be related to “residual seasonality” factors, as both January 2024 and 2025 show the highest monthly gains of the year.

Component data shows January housing costs grew just 0.2% month-on-month, the smallest since last September, with annual growth slowing to 3%. Used cars and trucks prices fell 1.8%, the largest drop in two years. Food price increases were the smallest since July 2025, with beef and veal down 0.4% and egg prices plunging 7%.

Some categories show signs of tariff effects. Clothing rose 0.3%, video and audio products up 2.2%, computers and smart home assistants up 3.1%, washing machines up 2.6%. Airfares surged 6.5%, the largest increase since mid-2022.

Disinflation Trend Consolidated

The Wall Street Journal believes January’s cooling inflation eases market worries that high Trump-era tariffs will cause broader, sustained inflation. Their report notes that lower overall price increases are positive for the economy, though rising prices for goods like clothing, TVs, and airfares continue to exert inflationary pressure on consumers.

The report cites analysis saying the latest annual numbers benefit from “base effects” as January 2025's high inflation data leave the calculation. With Fed chair Powell entering his final months, the Fed faces a delicate balancing act to curb inflation while protecting the job market.

Bloomberg emphasizes a key indicator—super core CPI's annual growth is the slowest since March 2021. The report notes prices for politically sensitive categories like gasoline, beef, and eggs have fallen, but housing prices keep rising and airfares have surged. Consumer products such as clothing, computers, and smart home assistants show signs of tariff impacts.

Bloomberg economists Anna Wong and Troy Durie say: “CPI normally rises in January as companies often hike prices at the start of the year. But this January, core CPI was clearly below historical averages. While there are still hot spots, there are strong disinflationary forces in autos, food, and energy. Overall, we believe disinflation will dominate in the coming months.”

Wall Street Reassesses Rate Cut Path

Lindsay Rosner, Head of Multi-Sector Fixed Income at Goldman Sachs Asset Management, said: “The Fed's 'normalizing' rate-cut path now looks clearer, as worries of a January spike have faded. However, the length of this path will depend on whether jobs continue to show improvement. We still expect two rate cuts this year, with the next move in June.”

PIMCO economist Tiffany Wilding called the inflation report “quite encouraging beneath the surface.” She noted two positive developments: pandemic-era sticky housing inflation is genuinely slowing; and tariff-related impacts have mostly faded. “As these effects fade, the Fed should feel more confident to cut rates. A few more rate cuts this year seem reasonable to us.”

Natixis’s Christopher Hodge described the data as “a strange mix,” but said it ultimately points in one direction: “In the coming months, we expect inflation to stay above ideal levels but not accelerate, which will allow the Fed to cut rates to address weak jobs data.”

Principal Asset Management Chief Global Strategist Seema Shah said: “Inflation met expectations, but the market is relieved, as price pressures remained restrained despite strong jobs data and further tariff risks earlier this week. But this still isn’t enough for the Fed to justify a rate cut soon. Continued labor market strength gives policymakers cover to keep rates unchanged.”

AllianceBernstein Senior US Economist Eric Winograd said: “The real point is that the inflation trend remains unchanged ahead of the government shutdown. Inflation is still sticky. The Fed is comfortable keeping (rates) stable. It’s fair to expect they’ll resume rate cuts later this year, once there’s clearer evidence that inflation is cooling.”

Bond Market Bets on Faster Rate Cuts

Bloomberg Intelligence (BI) Chief US Rate Strategist Ira Jersey commented: “The strong, near-term bullish steepening reflects relief that the CPI didn’t spike. At 2.4%, considering the gap between CPI and the PCE price index, this shows the Fed’s 2% target is approaching. The market may not price for earlier rate cuts, but pricing for a slightly lower terminal rate seems reasonable.”

Jersey further noted: “The main driver of short-term Treasury yields is repricing the endpoint of Fed rate cuts, not the timing of additional cuts. In the past two days, terminal rates have dropped by over 10 basis points, signaling a high chance of another rate cut by March 2027. If the next data sets are similar to recent ones, we think the market will start pricing for a Fed funds rate below 3%.”

CIBC Capital Markets’ Ali Jaffery said that the 2.4% and 2.5% year-on-year CPI figures are “basically consistent” with the Fed's favored main inflation gauge—the PCE price index running at the 2% pace policymakers desire. CPI has historically averaged about half a percentage point above PCE.

Inflation swap markets show traders expect CPI to peak mid-year before declining, matching market expectations that the Fed will begin cutting rates around June or July. The initial reaction in Treasuries weakened as attention shifted to broader implications of this week’s data, with yields at each maturity falling 1-2 basis points at 9am EST.

Wells Fargo Securities Managing Director Aroop Chatterjee said: “The lack of material surprises may keep the Fed focused on the labor market. The market may overestimate the likelihood of Fed rate cuts this year.”

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