U.S. inflation exceeds expectations; Fed's high interest rate policy may continue.

In February 2025, the inflation data for January released by the United States exceeded market expectations, raising concerns over the risk of reflation in the country. The main drivers of this inflation increase were the rising prices of core goods and energy. As a result, the Federal Reserve may maintain its high interest rate policy for a longer period to ensure that inflation is effectively controlled.

Inflation Exceeds Expectations, Core Goods Prices Drive Up CPI
The market had previously expected the overall CPI for January to remain roughly stable, with a downward trend in the core CPI. However, the latest data shows that both the core CPI and the overall CPI rebounded in January, significantly exceeding market expectations. Core services inflation continued to decline slowly, but the increase in core goods prices was a major driver, notably with the rising prices of used cars having a significant impact on inflation. Simultaneously, the rise in energy prices pushed the overall CPI back to the "3" range, further adding upward pressure on inflation.

Delayed Effect of Rent Not Fully Evident, May Hinder Future Inflation
Typically, U.S. housing prices lead rental prices by about 18 months, so early 2025 would be the window for rental inflation driven by a rebound in housing prices. However, the data from January shows that rent CPI is still declining, and core service prices have not rebounded significantly, indicating the delayed effect of rent is not yet fully manifest. In the future, rising rent prices could hinder the decline of core inflation, further complicating the Federal Reserve's task of controlling inflation.

High Interest Rate Policy May Persist, New Tariffs as an Inflation Variable
Currently, the Federal Reserve remains highly attentive to the inflation trend. Due to yet unrealized rebound factors in inflation, the market generally anticipates that the Fed will adhere to the policy path of "maintaining high interest rates for a longer period" to prevent a resurgence of inflation. Additionally, the implementation of a new round of reciprocal tariffs could further elevate core goods prices, making the Federal Reserve more cautious in its interest rate cut decisions.

Market analysts believe that the current period is sensitive to inflation, and any rebound in inflation data might be amplified or excessively interpreted by the market. As core goods inflation moves out of the deflationary zone, combined with the impact of new tariffs, inflation could face new upward pressure, and the Federal Reserve's high interest rate policy may last longer than the market anticipates.

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