Recently, the US Federal Reserve (Fed) has been closely monitoring the latest Consumer Price Index (CPI) data and assessing its potential impact on monetary policy.The annualised CPI growth in January 2025 reached 3%, the first increase in six months, a figure that has sparked fears of renewed inflationary pressures in the market. As of 14 February 2025, the US Dollar Index was trading at 105.12, up 0.31% from the previous reading, and still at the highs of the last decade.
The US Consumer Price Index (CPI) is a series of consumer price indices published monthly by the Bureau of Labor Statistics (BLS). It is one of the primary indicators used to measure inflation. Generally, a CPI exceeding 3% is defined as inflation, while a rate above 5% indicates severe inflation. CPI is often an important reference indicator for market economic activity and government monetary policy. Stable CPI, full employment, and GDP growth are considered key socio-economic goals. If the Consumer Price Index rises too sharply, it indicates that inflation has become an economic destabilizing factor, raising the risk of tightening monetary and fiscal policies, which in turn may cloud economic prospects. Therefore, excessive CPI increases are generally unwelcome by the market. Policy measures to address this include interest rate hikes, monetary tightening, prudent fiscal policies, increasing production, and stabilizing prices.
The US CPI data is usually released once a month by the US Department of Labor between the 10th~14th of each month for the previous month, which varies depending on the daylight saving time (20:30pm Hong Kong time for summer and 21:30pm Hong Kong time for winter.) Detailed information can be found on the US Bureau of Labor Statistics website. The current January CPI figures were released on 12 February 2025, the next US CPI report is scheduled for 12 March 2025 at 8:30am EST.
According to data from the US Bureau of Labor Statistics (BLS), the annual CPI growth rate for January 2025 reached 3%, marking the first increase in six months. The core CPI (excluding food and energy prices) recorded a year-on-year growth of 2.6%, slightly higher than market expectations. This data has raised concerns about the possible resurgence of inflation pressure and has directly affected the US dollar and euro exchange rates.
It should be noted that the BLS applies seasonal adjustments when calculating CPI to remove the impact of seasonal factors on prices. However, recent seasonal adjustments may not have completely eliminated seasonal price fluctuations, resulting in a slight increase in January’s CPI data. Therefore, some economists remain cautious about this data, considering that it may not fully reflect the actual inflation pressure.
In response to the recent CPI data, Federal Reserve Chairman Jerome Powell stated that although inflationary pressure has increased, it is still necessary to observe the data over the coming months to determine the sustainability of the inflation trend. He emphasized that the Federal Reserve will adjust monetary policy flexibly based on the latest economic data to achieve the 2% inflation target. This statement has supported the US dollar exchange rate while putting pressure on the euro exchange rate, as investors generally expect the Federal Reserve to maintain higher interest rates.
The Federal Reserve’s preferred inflation indicator, the Personal Consumption Expenditures (PCE) Price Index, has recently shown signs of easing price pressure. The PCE Price Index rose by only 0.1% in November, marking the lowest increase in two months, indicating that core inflationary pressure has slightly weakened. This data provides the Federal Reserve with more room for policy adjustment and serves as an important reference for the future trends of the US dollar and euro exchange rates.
Overall, although recent CPI data shows that inflationary pressure has increased, considering the impact of seasonal adjustments and the trend of the core PCE index, market expectations for future Federal Reserve monetary policy remain cautious. Investors should closely monitor economic data in the coming months to assess the sustainability of the inflation trend and adjust investment strategies based on the latest information.
*The content of this article is for sharing and reference purposes only and does not constitute professional investment advice. Due to differences in individual circumstances and needs, you may contact the Cashback Island team or consult your financial planner for professional advice.
When the CPI (especially the core CPI) remains consistently above the Federal Reserve’s 2% target (e.g., the core CPI reached 3.3% in January 2025), the Federal Reserve may extend its high-interest-rate policy to curb inflation.
A rise in CPI means that prices are increasing and the currency is depreciating, reducing the quantity of goods and services that residents can purchase with the same amount of money. A decline in CPI indicates that prices are falling and the currency is appreciating, allowing residents to buy more goods and services with the same amount of money. In other words, CPI can be used to adjust current-price-based expenditures or monetary income to measure actual consumption and living conditions. The level of CPI directly reflects the impact of changes in the prices of consumer goods and services on residents’ lives.
CPI is usually calculated using the Laspeyres formula: CPI = (Current year price × Base year quantity ÷ Base year price × Base year quantity) × 100
