The January inflation report published yesterday in the U.S. was worse than expected. CPI grew 3% YOY and Core CPI (ex food and Energy) grew 3.3%. Note that these numbers do not reflect the effect of any tariff yet. Not only inflation is picking up, but expectations are also trending up. As you can see in the chart below, the 2 year breakeven is picking up and it’s now well above 3%, signalling that investors are projecting stickiness and higher prices 2 years from now. Rate cuts expectations have disappeared for 2025, and bond yields rose yesterday as a result. Government spending keeps weighing on inflation and Congress doesn’t look like it’s going to abandon its spending habits easily. The trade deficit is now the biggest in history, which negatively affects GDP growth. If the U.S. continues this path, absent any real breakthroughs in AI that increase productivity, economic growth will decrease and inflation will rise.
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