What Happened? January CPI increased at +0.5% m/m (+3.0% y/y), above consensus of +0.3% m/m (+2.9% y/y). Meanwhile, Core CPI exceeded expectations at +0.4% m/m (+3.3% y/y), above both the consensus of +0.3% m/m (+3.1%) and the previous reading of +0.2% m/m.
What does this mean for our forecasts? We now expect headline CPI of 3.1% for 2025e and 2.9% for 2026e, up from 2.8% previously for both years. Consensus for 2025e and 2026e are 2.7% and 2.5%, respectively. At the same time, we are also taking up our Core CPI forecasts to 3.4% for 2025e (vs. 3.0% previously) and 3.0% for 2026e (vs. 2.8% previously). Our Core CPI estimates for 2025e and 2026e compare to a consensus of 2.5% and 2.3%, respectively, over the same period.
For the Fed, we maintain our projection of two rate cuts this year and another two in 2026. However, we acknowledge the January data presents a tougher starting point for Fed policymakers.
Meanwhile, we continue to expect 10-year Treasury yields to fluctuate within the 4.5-4.75% range in the near term, but we believe that the market’s pricing of no net Fed cuts over the next five years is overly hawkish, which is why we are using 4.0% for our 2026 10-year forecast.
Overall, our message is that inflation and rate risks still skew towards higher for longer, as part of our higher resting heart rate for inflation thesis. Specifically, the rekindling of goods inflation in this report, more volatile services data, and ongoing tariff-related uncertainties are all now elevating the risk that the Fed could need to maintain its current stance for a longer period.
Bigger picture, we continue to advocate that this is a New Regime for investing. We believe that we are witnessing a structural change in the relationship between stocks and bonds, which warrants a fundamental ‘re-underwrite’ of the traditional 60/40 portfolio. We also maintain conviction that investors should overweight collateral-based cash flows. Finally, we continue to think that excess returns will accrue to allocators who can invest thoughtfully behind big themes such as capital heavy to capital light, security of everything, and worker productivity, all areas of opportunity that can serve as foils to today’s more unsettled macroeconomic environment.
