John and Judith R. from Lexington, KY ask: Hello Mitch, With the latest inflation report, it looks like prices are starting to move in the wrong direction again. Do you foresee this being a problem in 2025 for interest rates and ultimately the stock market? Thank you.
Mitch’s Response:
Thanks for writing, John and Judith. Please allow me to walk readers through the latest consumer price index (CPI) report and then I’ll weigh in on your question.
In January, headline CPI rose 3% year-over-year, and core inflation—which excludes volatile food and energy prices—came in at 3.3% for the month. On a monthly basis, CPI climbed 0.5%, which was above consensus estimates for a 0.3% increase. This marked the largest monthly jump since August 2023. Wages also saw a notable increase, and the University of Michigan’s consumer survey reflected growing inflation expectations over the next year. All of these readings were hotter than most were expecting.1
The latest inflation report was especially concerning because it revealed broad-based price pressures rather than being driven by expected categories like housing and rent, which have been gradually cooling. Instead, inflation accelerated across goods and services that had previously shown signs of stabilizing. The market has also been weighing the potential effects of new import tariffs, weighed against supply-side factors such as deregulation and increased energy production that could help counteract price increases.
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There are reasons for caution before drawing broad conclusions about the future path of interest rates and the effect on stocks, however. The largest price increases were seen in auto-related expenses and airline fares, which could decline in the coming months. One of the most significant recent price spikes was also in eggs, which surged over 15% from December, marking the sharpest rise since mid-2015. This accounted for nearly two-thirds of the overall increase in grocery prices, largely driven by a bird flu outbreak.
Additionally, the Federal Reserve tends to focus more on the PCE price index inflation gauge when setting policy, which likely hovered around 2.6% in January. Weather fluctuations may also have skewed the reported wage gains, and another Fed survey suggested inflation expectations were not rising as sharply as the University of Michigan report indicated.
I do think that a balanced and clear-eyed analysis indicates waning optimism that inflation is moving in the right direction. The latest CPI report casts doubt on whether current policies are sufficient to bring inflation down to the 2% target, and Fed Chair Jerome Powell reaffirmed the central bank’s commitment to maintaining restrictive monetary policy for now. That being said, I think this argues more for a “pause” in lowering rates than reversing course, and markets and the economy have demonstrated for years that they can absorb the impact of rates at these levels.
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Disclosure
1 CBS News. February 12, 2025. https://www.cbsnews.com/news/cpi-report-january-inflation-what-it-means-for-your-money/
2 ZIM may amend or rescind the free guide offer, Using Market Volatility to Your Advantage, for any reason and at ZIM’s discretion
3 ZIM may amend or rescind the free guide offer, Using Market Volatility to Your Advantage, for any reason and at ZIM’s discretion
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