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Higher US inflation than expected by the market
Federal Reserve's inflation target unlikely to be reached
Economists at Union Investment do not expect any further interest rate cuts
Corporate bonds remain preferred to government bonds on the bond side

The latest US inflation data shows that the Federal Reserve's two percent target is once again receding into the distance. According to the experts at Union Investment, the end of the disinflation trend and the continued solid economic development in the US are closing the window for interest rate cuts by the Federal Reserve

Eating eggs was an expensive pleasure in the USA in January. The price of the temporary luxury good rose by 15.2% in January compared to the previous month, the largest monthly increase since June 2015. Although this was due to a shortage caused by avian flu, egg prices nevertheless indicate the current upward direction of consumer price trends in the USA. Core inflation, excluding volatile food and energy prices, also rose by 0.4% in January compared to the previous month. The last time there was such a monthly increase in the rate was in March 2024. The annual rate rose slightly to 3.3%, somewhat more than expected by the market and Union Investment's economists.

The disinflation trend has come to an end
Although the increase is partly due to seasonal factors typical of January, the significant rise in the core services sector (excluding rents) was surprising, with an increase of 0.8% compared to just 0.2% in the previous month. The main contributors to this were car insurance and public transportation. Used cars also became significantly more expensive with an increase of 2.2%, while the core goods category recorded a comparatively significant increase of 0.3% compared to December.

While prices in these two categories are no longer expected to fall further, but are also unlikely to rise significantly again , the disinflation trend in residential prices is continuing gradually. In the case of rents, price momentum was roughly at the previous month's level. In view of the fact that changes in new rents affect inflation with a considerable time lag, the declines in new rents seen until 2023 will also have a dampening effect on the housing component in the coming months.

US Federal Reserve (Fed) not in a hurry

The governor of the US Federal Reserve, Jerome Powell, commented on the inflation figures during his semi-annual hearing before the US Congress: "We're close [to inflation], but we're not there yet". In view of the higher than expected data, the Fed intends to maintain its restrictive monetary policy for the time being. Powell reacted calmly to the higher inflation: "We're holding back on one or two good data points and we're holding back on one or two worse data points," he said.

The US producer prices published one day later were also stronger than expected in January, rising by 0.4% compared to the previous month. However, a closer look at the components that are included in the PCE core rate (PCE = Personal Consumption Expenditures Price Index), the Fed's preferred inflation measure, shows that the price increase is likely to be less pronounced here than in the CPI core rate (CPI = Consumer Price Index). For example, prices for airline tickets, insurance and healthcare have become cheaper.

Following the publication of the inflation figures, yields on ten-year US government bonds briefly rose to 4.6%. The realization that the so-called PCE core rate is more likely to fall caused a countermovement.

The US Federal Reserve is not expected to lower interest rates further for the time being.
The latest price data has surprised on the upside.

Source: Bloomberg, Union Investment; as at 14 February 2025.

Source: Bloomberg, Union Investment; as at 14 February 2025. *Expectations for five years in five years

Union Investment does not expect another interest rate hike in 2025

This is also supported by the fact that the Trump administration's emerging trade policy is likely to have a pro-inflationary and growth-dampening effect from the middle of the year. Whether and to what extent the announced tariffs, tax cuts, deportations and planned deregulation will actually have an impact on growth and prices depends on how they are actually implemented.

Based on the latest inflation data and the continuing solid economic development, analysts at Union Investment believe that the window for an interest rate cut by the Federal Reserve is closing. While they previously assumed a rate cut in June, they now expect no further rate cut in 2025.

Caution with political stock exchanges

However, even if the momentum in core inflation is likely to be somewhat more moderate again in the coming months: The current data underlines the fact that the Fed will not achieve its prerequisite for further interest rate cuts, namely to substantially lower the annual rate of inflation towards two percent, either in 2025 or 2026, according to Union Investment's economists. In addition to the fundamental data, erratic announcements on future US tariff policy are influencing market expectations. In view of the changing news situation from the USA, the financial markets are currently experiencing increased volatility. Accordingly, the bond experts at Union Investment are currently exploiting tactical opportunities to take advantage of anti-cyclical profit opportunities on the US bond market. From a strategic perspective, they expect the term premium on US Treasuries to continue to rise and continue to prefer corporate bonds with good credit ratings.

Source: Union Investment, all information, explanations and illustrations are as of 14 February 2025, unless otherwise stated