NEW YORK, Feb 13 - U.S. consumer prices increased less than forecasters anticipated in January, according to fresh inflation data that reinforces a narrative allowing the Federal Reserve room to consider interest rate reductions later this year.
The Consumer Price Index rose 0.2% in January, following an unrevised 0.3% gain in December. On a 12-month basis, the CPI climbed 2.4%, undercutting the consensus estimate of a 2.5% year-on-year increase from economists polled by Reuters. The release of the report was pushed back slightly by last week’s three-day federal government shutdown.
Market response
- Stocks - U.S. stock futures were flat to slightly lower following the inflation release.
- Bonds - U.S. Treasury yields slipped after the report, with the yield on benchmark U.S. 10-year notes down 2.9 basis points to 4.075%.
- Foreign exchange - The dollar index was flat to slightly higher, trading at 96.932.
Market strategists and investment officers reacted to the data by weighing how it affects the Fed’s policy calculus and which asset classes may stand to benefit or face pressure.
Phil Orlando, chief market strategist at Federated Hermes in New York, called the print “better than expected particularly at the nominal level” and said it bolsters the view that the Fed could cut rates multiple times as leadership transitions at the central bank unfold. Orlando noted that while recent labor market data had been stronger than anticipated - a factor that previously pushed markets lower - the comparatively tame inflation reading supports a trajectory that could lead to lower rates, at least in his assessment. He said both bonds and stocks reacted initially to the expectation that the report is constructive for the Fed’s case to reduce rates over the longer term.
Brad Conger, chief investment officer at Hirtle, Callaghan & Co in Bryn Mawr, Pennsylvania, described January’s CPI as a “Rorschach test for investors,” pointing to dispersion across different CPI components. For Conger, divergence across items is beneficial because it suggests the economy is not uniformly inflationary. He added that in his view, a case-by-case picture of shortages and abundance is not indicative of broad inflation, and he cited AI as a long-term deflationary impulse. Conger said his firm has an overweight position in duration in fixed income and favors interest rate-sensitive sectors such as homebuilders and real estate.
Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management in Milwaukee, said the CPI reading likely does not materially alter the Fed’s overall story. He described markets as being in a holding pattern and emphasized continued focus on the labor market. Schutte noted that while the jobs report was stronger than expected, underlying details on non-farm payrolls were weaker and concentrated in non-cyclical sectors such as healthcare and social assistance. On inflation, he said core CPI appeared to be coming down but that the latest core reading interrupted a recent streak of lower numbers. He characterized the market’s response as a wait-and-see approach and suggested volatility could persist amid trades tied to AI themes. Schutte said he did not see a meaningful change in futures pricing for Fed cuts.
Josh Jamner, senior investment strategy analyst at ClearBridge Investments in New York, wrote via email that the relatively tame January inflation print lifted risk assets, but warned that inflation pressures beneath the headline should temper optimism about the likelihood of a third rate cut this year. Jamner highlighted that continued shelter disinflation helped keep headline and core CPI in check, but that "'supecore' CPI - core services ex-shelter - accelerated by 0.6% in January," its strongest monthly rise in a year. He framed that acceleration as a signal of demand-driven inflation, which, he argued, could give some Federal Open Market Committee members pause when considering additional cuts. Jamner stressed that, under the Fed’s dual mandate of price stability and maximum employment, mounting inflationary signs could weigh more heavily on policy decisions than previously expected.
Peter Cardillo, chief market economist at Spartan Capital Securities in New York, called the report a "good number," saying it suggests inflation is not accelerating and that tariff-related inflationary pressures may be moderating. Cardillo said he expects a rate cut sometime in June, but underscored that a great deal will depend on labor market readings. He added that if inflation continues to move in the current direction, he anticipates a cut once the new Fed chairman takes office.
Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management in New York, said in an email that the CPI print clears some concern around a strong January inflation reading and that the Fed’s path to normalization cuts appears clearer. Rosner noted that how long or short that path will be depends on employment trends, given the Committee’s sensitivity to labor market weakness. Her team continues to expect two cuts this year, with the next move coming in June.
Michael Metcalfe, head of macro strategy at State Street Markets in London, said the key takeaway for rate markets and equities is that the disinflation trend persists. He argued that the data reinforces the view that peak inflation worries are behind markets and paints a picture of an improving inflation outlook, which could allow for rates to fall later in the year.
What the data means for markets and sectors
- Fixed income - The slight downward move in Treasury yields reflects investor positioning that could accommodate eventual rate cuts.
- Interest rate-sensitive equities - Sectors like homebuilders and real estate were highlighted by some strategists as potential beneficiaries of lower rates and remain areas of interest.
- Consumer and services - Measures such as core services ex-shelter showed underlying pressure, pointing to areas of the economy where demand-driven inflation may persist.
The January CPI outcome - modest month-on-month growth and a year-on-year rate below expectations - keeps policy options open for the Federal Reserve. While the headline numbers ease some inflation concerns, several market participants emphasized that beneath-the-surface indicators, particularly services inflation excluding shelter and labor market strength, will be central to how policymakers judge the timing and scale of potential rate reductions.