• US core CPI inflation surprised higher and is back on an upward trend...
  • ...that will likely translate into an up—tick in the Fed’s preferred core PCE reading
  • The jump in core service prices will alarm the Fed
  • Treasuries got smacked as Fed rate cut pricing was pushed out again
  • BoC cut pricing was also pushed out on Fed implications...
  • ..with CDN CPI tracking a solid jump
  • US CPI // core CPI, m/m % SA, January:
  • Actual: 0.3 / 0.4
  • Scotia: 0.2 / 0.3
  • Consensus: 0.2 / 0.3
  • Prior: 0.2 / 0.3 (revised from 0.3 / 0.3)

US core CPI walloped Treasuries and sent shivers down the spines of anyone who still thinks the Fed should be in a big rush to cut.

Core CPI was up by 0.4% m/m (0.39% to be exact) which only three out of 68 forecasters guessed correctly, 15 who went with 0.1 or 0.2 did not, and 50 others came close to. It was hotter than the nowcast estimates from the Cleveland Fed. The readings are starting to creep higher again over recent months from the summertime lows (chart 1). 

Chart 1: US Core CPI Inflation

The core CPI reading probably means that core PCE that is due out on February 29th is tracking about 0.3% m/m SA. If so, then that would be meaningful after prints of 0.14, 0.06 and 0.17 over the prior 3 readings because it would send a caution against assuming that such a soft patch will continue.

There was a large market reaction and the details were arguably even more impactful.


The upside surprise and the firm details send yields soaring with the two-year yield jumped by about 15bps to 4.6% and the 10-year Treasury up by about 14bps to 4.28%. Pricing for a cut at the March 20th decision was completely eliminated with May’s pricing reduced by 7bps to just about 10bps. Chart 2 shows the intraday moves in Fed pricing over the next three meetings. I cannot see the Fed cutting at the May meeting on the back of numbers like these and the fact that Q1 US GDP is likely to come in strong just days before the meeting. Our call for the first cut to land in Q3 is on the fence between July and September and an awful lot has to go right to get a cut by then. I can’t rule out tightening.

Chart 2: Fed Fund Pricing By Meeting

Bank of Canada Pricing Dragged Higher

Market pricing for Bank of Canada policy rate moves was also affected. It was shaved a little by way of spillover effects via the relative central bank influences (chart 3). 

Chart 3: BoC Market Pricing By Meeting

Now it's onto next Tuesday's Canadian CPI. I have estimated a headline rise of 0.6% m/m NSA or 0.4% m/m SA and 3.5% y/y up from 3.4%. Traditional core CPI is estimated at 0.5% m/m SA. Add to that tomorrow's ripping home sales data and expectations for a strong Spring housing market and just keep pushing out timing for BoC rate cuts while retaining a material risk of tightening. Our call for a first cut in September needs a lot to go right and I continue to think that there is higher inflation risk and hike risk in Canada than the US.

Details—Core Service Prices Surged

Core services inflation (ex-energy and housing) soared by 0.85% m/m SA which is the hottest reading since April 2022 (chart 4). That works out to 10.7% m/m at a seasonally adjusted and annualized pace (SAAR). In other words, the 0.7% m/m SA jump in total services prices excluding energy wasn’t just because of housing; it was because of much more widespread upward pressure on service prices.

Chart 4: US CPI Core Services Ex-Housing

That surge in service prices was more than enough than what was required to offset core goods disinflation of -0.3% m/m SA (chart 5). Core goods disinflation remains intact.

Chart 5: US Goods Inflation

Housing did, however, contribute to overall services inflation with shelter up 0.6% m/m SA as rent of primary residences was up 0.4% (chart 6) and owners’ equivalent rent was up 0.6% (chart 7). 

Chart 6: US Rent Inflation; Chart 7: Sticky Housing Inflation

Within goods prices, disinflation was partly driven by vehicle prices. Used vehicle prices fell by 3.4% m/m SA (chart 8) and new vehicle prices were flat (chart 9). That shaved about 0.1% m/m SA off of core CPI in weighted terms.

Chart 8: Used Vehicle Inflation; Chart 9: New Vehicle Inflation

Clothing also dented goods prices (chart 10). So did household furnishings (chart 11), recreation goods (chart 12) and drug prices (chart 13).

Chart 10: US Apparel; Chart 11: US CPI: Household Furnishings; Chart 12: US CPI: Recreation Goods; Chart 13: Prescription Drug Prices

What drove services inflation other than housing? Here’s a word of advice: don’t get sick (charts 14, 15). And if you drive, then I don’t need to tell you what’s going on with soaring auto insurance premiums (chart 16). Financial services prices are also rising (chart 17). Don’t have fun either (chart 18), or maybe folks are having so much of it. 

Chart 14: US Hospital Services; Chart 15: US Health Insurance; Chart 16: Soaring US Motor Vehicle Insurance; Chart 17: US Financial Services
Chart 18: US CPI: Recreation Services

There were also gains in airfare (chart 19), plus auto repair services were up 0.8% m/m. Medical care services increases 0.7%. 

Chart 19: US Airfare

As for why headline surprised higher, it was principally because of the higher than expected core reading. Gasoline prices (chart 20) behaved about as estimated (-3.3% m/m SA) and so did food prices (+0.5% m/m) as food at home was up 0.4 and food away from home was up 0.5. Charts 21 and 22.

Chart 20: US CPI: Gasoline; Chart 21: US Food Prices; Chart 22: US Food Prices

More Details!

Please also see chart 23 that breaks down the whole CPI basket and chart 24 that does likewise in terms of weighted contributions to the m/m change in CPI. Charts 25 and 26 do likewise for y/y inflation by component.

Chart 23: January Changes in US Headline CPI Categories; Chart 24: January Weighted Contributions to Monthly Change in US Headline CPI
Chart 25: January 12-Month Changes in US Headline CPI Categories; Chart 26: January Weighted Contributions to the 12-Month Change in US Headline CPI

Please also see the detailed table at the back that breaks down the basket with micro charts and z-score measures of deviations from recent trends by component.

Table: US Inflation Component Breakdown
Table: US Inflation Component Breakdown
Table: US Inflation Component Breakdown