US CPI surprise means rate cuts in 2025 'out of the question' with hike a possibility

Today’s US inflation report will strike fear in the hearts of Federal Reserve officials, and will likely encourage the FOMC to sit on its hands for the foreseeable future.

If the unexpected increase in the annual inflation measure wasn’t bad enough, we’re also seeing worrying signs of a bubbling in price pressures in the underlying index, which posted its largest monthly climb since April 2023, at least once accounting for two decimal places.

To make matters worse, we see little reason to suggest that price pressures will ease any time soon: wages are continuing to grow at a strong pace, consumer demand is robust and President Trump’s tariffs look set to push up imported prices. Indeed, we see practically nothing in recent data on inflation, the economy or the labour market that would indicate that the Fed’s 2% inflation target is not even remotely close to being in reach.

We think that markets can practically forget about the possibility of another Fed cut in the first half of 2025, and it is now not out of the question that the next move in rates is higher, rather than lower.

The fading likelihood of additional easing is providing good support for the US dollar, which we think remains well placed to outperform in the near-term.