US CPI in Focus Amid Inflation & Growth Concerns
Article published on March 12th, 2025 4:00AM UK Time
US Inflation Set to Moderate, But Tariff Risks Loom
Market attention is firmly on the upcoming US CPI report, with analysts expecting February headline inflation to rise 0.3% M/M (down from 0.5% in January), while the core rate is also seen at 0.3% M/M (down from 0.4% prior). Despite these expectations of moderating inflation, recent price indicators have shown more hawkish signals:
- ISM Manufacturing Prices Paid moved higher to 62.4 (prev. 54.9), signaling cost pressures in production.
- ISM Services Prices jumped to 62.6 (prev. 60.4), with businesses citing tariff-related price increases.
- The Fed’s Beige Book noted moderate price increases across regions, with some areas experiencing accelerating inflation—largely attributed to incoming tariffs and rising input costs.
However, the full impact of new US tariffs is not yet reflected in this CPI data, meaning inflation risks may still be underpriced in the near term.
Fed Officials Divided on Inflation’s Path
Fed policymakers are closely watching inflation expectations, particularly as new tariffs take effect:
- NY Fed’s Williams noted that tariff-related inflation risks are emerging and emphasized tracking inflation expectations via the University of Michigan Consumer Sentiment survey and the NY Fed’s inflation gauge.
- Treasury Secretary Bessent, however, dismissed concerns that Trump’s tariff hikes would fuel long-term inflation, calling them temporary, one-time price adjustments rather than a sustained economic issue.
This divergence underscores a growing debate within markets and the Fed:
- If inflation stays contained, the Fed may stay on track for rate cuts later this year.
- If tariffs drive a broader inflation surge, the Fed may be forced to delay easing, keeping rates higher for longer.
Markets Shifting Focus to Growth Risks
While inflation remains a key concern, traders are increasingly focusing on growth dynamics, as recent US economic data has disappointed:
- Money markets now price in three 25bps Fed rate cuts this year, a shift from two fully priced cuts just a week ago.
- Further weaker data could reinforce dovish bets, leading to lower Treasury yields and renewed USD weakness.
Market Implications: What to Watch
📉 If CPI surprises to the downside
- USD weakens as rate cut expectations increase
📈 If CPI surprises to the upside
- USD strengthens, as inflation concerns delay rate cuts
- Treasury yields rise, pressuring risk assets
- Equities likely sell off, as markets reprice a “higher-for-longer” Fed
