February 14, 2025/CSL Research
Consumer prices in the United States surged in January 2025, recording the sharpest increase in nearly 18 months. The Consumer Price Index (CPI) rose by 0.5% month-on-month (m/m), the largest gain since August 2023, accelerating from December 2024’s 0.4% m/m increase.
On a year-on-year (y/y) basis, the CPI climbed 3.0%, marking the highest annual rise since June 2024, following a 2.9% y/y gain in December 2024. Excluding food and energy, the core CPI advanced by 0.4% m/m in January, doubling December’s 0.2% m/m increase. Annually, core CPI rose by 3.3% y/y, slightly up from December’s 3.2% y/y gain.
While inflation typically overshoots expectations at the start of the year due to residual seasonality, the higher-than-expected rise in January was partly driven by businesses pre-emptively increasing prices. This was in anticipation of broader and higher tariffs on imported goods. The biggest contributors to the inflation spike were shelter, food, and gasoline.
Shelter costs rose by 0.4% m/m, accounting for nearly 30% of the overall CPI increase. Food prices climbed 0.4% m/m, accelerating from December 2024’s 0.3% m/m rise. Grocery store prices saw an even sharper increase, jumping 0.5% m/m, with egg prices surging 15.2% m/m due to an avian flu outbreak that led to supply shortages and higher costs.
The rise in CPI for January 2025 reinforces the Federal Reserve’s stance that it is in no rush to cut interest rates amid growing economic uncertainty. It also serves as a cautionary signal for the Trump administration’s economic policies, including proposed tariffs on imported goods, tax cuts that could overstimulate an already strong economy, and mass deportations of undocumented immigrants, which may lead to labour shortages and increased business costs, particularly in wages. In February 2025, an additional 10% tariff on Chinese goods took effect, with a 25% tariff on imports from Canada and Mexico set to be implemented in March. These tariffs are expected to further drive inflation, pushing it further away from the Federal Reserve’s 2% target.
In the U.S., Treasury yields are expected to rise gradually as investors adjust debt instrument valuations in response to increasing inflation. Meanwhile, the likelihood of a Federal Reserve policy rate cut in 2025 is diminishing. Market expectations, which initially projected four rate cuts, have now been scaled back to no more than two. The Fed maintained its benchmark overnight interest rate at 4.25%-4.50% in January 2025, following a total reduction of 100 basis points since September when it began its policy easing cycle.
For emerging and frontier markets like Nigeria, a shift away from the U.S. Federal Reserve’s dovish stance could lead to higher borrowing costs and inevitable capital outflows. This, in turn, may trigger economic shocks, including a depreciation of the domestic currency against the U.S. dollar as short-term capital (“hot money”) exits the financial system. As a result, the monetary policy committee of Nigeria’s Central Bank may be compelled to maintain elevated domestic policy rates to sustain foreign portfolio inflows and mitigate the impact of excessive capital outflows.
