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Giorgio Curti

Research Senior Associate

6 March 2025

The US stock market had a bit of a scare last month when the January Consumer Price Index (CPI) inflation figure for the US was released. No matter what spin you want to put on it, the print was materially hotter than expected. Core consumer prices (ie excluding food and energy) rose at an annualised rate of 5.5%, the biggest monthly increase in nearly two years.

Only the next day, that all felt like a false alarm, as the Producer Price Index (PPI) for January was released. Concerns seemed to abate, given lower than expected price rises in some specific categories. However, a closer look reveals that the softness was concentrated in generally volatile PPI categories – such as airfares, financial services and medical services – which don’t normally provide an accurate gauge of underlying inflationary pressures in the economy.

By contrast, the CPI print was significant for two reasons.

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Firstly, the so-called ‘January effect’. January plays an important role in setting the course for services inflation through the year as companies reset their prices for a large proportion of consumer services. Before the release, there was a widespread belief this January effect would be less marked than in previous years. In fact, before any adjustment for regular seasonal patterns in pricing, core consumer prices jumped by an almost identical amount to the two previous years, pointing to genuinely large actual price hikes rather than distorted seasonal adjustment models.

Secondly, the strength in CPI mostly came from core services. If we exclude shelter to obtain a more representative gauge of underlying inflationary pressures, core services inflation bottomed in the middle of last year and has been reaccelerating since. There are also signs that the labour market, having weakened last summer, has begun to tighten again. All this points to stronger core consumer services inflation to come.

There is one caveat. The shelter category mentioned above constitutes nearly 40% of core CPI. As the index measures the ‘average’ rent in the economy, it takes time for changes in the rental market to feed through to the published data. Judging by experimental new tenant indices, we can expect the shelter category to continue moderating over the next few months, which may support some further disinflationary progress.

Potential near-term moderation in shelter aside, the bigger picture is far from rosy. As this month’s chart illustrates, in the five years to the eve of the covid 19 pandemic, US CPI inflation averaged 2% annually. In the five years since, that figure has risen to 4.3% – the highest since early 1986. University of Michigan data last month showed surprisingly high inflation expectations, and with Trump’s actions looking likely to err on the inflationary side (think tariffs, export controls, deportations…), any upside inflation surprises in the short term may well anchor inflation expectations at a higher level. Something the Fed will be desperate to avoid. It’s now four years since year-on-year CPI was at or below the Fed’s target.

Welcome to the new regime of higher and more volatile inflation.

Giorgio Curti

Research Senior Associate

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Piers Wheeler

Director – Institutional

T +44 (0)20 7963 8258

Developing and executing asset management strategy for capital raising and strategic relationship management. Coverage includes EMEA, Asia and Australia. Piers joined Ruffer in 2021, having previously worked with asset management firms including Eastspring, AMP Capital and LEK as a strategic consultant. He holds a MA from the Bayes Business School and a BA (Hons) from the University of Oxford.

Annabel Paterson

Senior Associate – Institutional

T +44 (0)20 7963 8123

Joined Ruffer in 2021, having graduated with a first class honours degree in land economics from the University of Cambridge. After two years working with the UK Private Wealth team and completing her IMC and CFA Level I qualifications, she now supports Ruffer’s global business development and client servicing efforts.

Articles by Annabel

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