The Inflation Arc Bends Lower from Here

• Annualized inflation growth fell to 2.4% in January.

• January is usually a seasonal accelerant, yet this year it came in soft.

• Annual growth could be at or below 2% by mid-year.

Inflation’s latest drop wasn’t a mystery at all; it was the inevitable payoff from the heaviest comps rolling off…

The annualized Consumer Price Index (“CPI”) data for January finally landed last week. And it delivered exactly the setup I’ve been flagging for some time. The year‑over‑year pace slipped to 2.4%, down from December’s 2.7%, as the hottest numbers from early 2025 rolled off. This wasn’t a surprise, it was math. When you replace last January’s jarring 0.7% surge with a 0.4% gain, the annualized rate has no choice but to fall. Investors often treat inflation as a mystery, but sometimes the story is simply the comps…

After spending decades pitching ideas to money managers, you learn that nothing resonates faster than a clean growth arc. A company can look like it’s stalling even when demand is fine—because it’s running into last year’s blockbuster results. Once those tough comps fade, momentum reappears and the stock usually rallies. The same dynamic applies to economic data.

As I stated in mid‑January, CPI walks into its heaviest comparisons in January and February. Those two months alone accounted for just over 1.1% of the 2025 annualized pace of 2.7%. That made acceleration nearly impossible. Now those heavyweights are dropping out. And as they do, the inflation math turns friendly. Even a 0.3% monthly gain in February pulls the annualized rate lower.

None of this forces the Federal Reserve’s hand in March. But it does widen the policy cushion. With real rates easing and the toughest comps soon fading in the rearview mirror, the Fed’s room to cut rates should improve. That backdrop should support a steady rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

The first place to start is with inflation’s seasonality. Those are the predictable, recurring patterns in monthly CPI readings that reflect how prices typically behave at the same time each year. Certain months tend to run hotter or cooler for structural, calendar‑driven reasons, independent of the underlying trend. By studying this, we get a clearer sense of how the forthcoming data should unfold.

In the chart below, I compiled the monthly data from 2000–2025 into simple averages to observe the typical pattern…

As you’ll notice, inflation growth tends to start the year hot, cool through spring and summer, and contract into year‑end. That’s not different from what we’ve experienced in the last few years. The bulk of the annual growth happens in the first two or three months before fading.

Based on the January data, the year is off to a below-average start. The last time this happened was in 2019, when inflation was much closer to the Fed’s 2% target. That year also saw the federal funds target hover around 2.25%, or more than 100 basis points below where we are today.

So now let’s look at the pace of growth we’ve been experiencing over the last six months. Prices have increased by just over 0.1% per month since August. That implies a 1.2% annualized rate.

The next step is to forecast what the annual pace might look like over the next nine months and compare that to Wall Street’s expectations for rate cuts. That gives us a sense of where real rates (fed funds minus inflation) could be headed and how much easing room the Fed has. To stay conservative, I’m rounding the monthly inflation estimate up to 0.2%…

My table lays out the month and year on the left, Wall Street’s federal funds expectations next to it, followed by the forecast annual CPI rate and the resulting real rate of interest. Institutional investors are anticipating two more cuts. Based on our forecast, annualized inflation could hit 2% by April and fall to 1.8% by June. And despite those potential cuts, the Fed could still have a 120‑basis‑point cushion by October.

At the end of the day, if inflation sticks to trend, we could be at or below 2% by mid‑year. That increases the central bank’s capacity to support growth. It doesn’t guarantee action, especially with a potential leadership change in June, but it sends a clear signal to Wall Street. There’s ample room to support the economy, jobs, and spending. And when the math is friendly, the market usually figures it out first. That should underpin a steady rally in the S&P 500.

Five Stories Moving the Market:

Nvidia said it has signed a multiyear deal to sell Meta Platforms millions of its current and future artificial intelligence chips; Nvidia did not disclose a value for the deal, but said it includes its current Blackwell chips as well as its forthcoming Rubin AI chips – Reuters. (Why you should care – the Grace and Vera processors that are also part of the deal have shown an ability to drastically reduce power demands)

A handful of software firms including McAfee have released their earnings ahead of schedule in a bid to convince lenders of their resilience to disruption from artificial intelligence; McAfee told its debt investors that preliminary fourth-quarter revenue was $626 million, little changed from the prior year – Bloomberg. (Why you should care – the short narrative doesn’t always have to be correct, but it does need evidence that the opposite is true for a cover rally to take place)

U.S. and Iranian officials said nuclear talks in Geneva are making progress, after Tehran indicated it was willing to compromise around the edges of its nuclear program – WSJ. (Why you should care – a resolution could help to reopen Iran’s energy resources to global markets)

The U.S. Federal Reserve could approve "several more" interest rate cuts this year if inflation resumes a decline to the central bank's 2% target, according to Chicago Fed President Austan Goolsbee – Reuters. (Why you should care – even though Goolsbee’s not a voter this year, this is a dovish shift in his monetary policy outlook)

Federal Reserve Governor Michael Barr said interest rates should remain steady until officials see more evidence that inflation is heading toward the central bank’s 2% target – Bloomberg. (Why you should care – Barr, a voter, is signaling he’s unlikely to support a rate cut at the upcoming monetary policy meeting in March)

Economic Calendar:

Markets are closed in China and South Korea

Earnings: ADI, AWK, BKNG, CF, CVNA, DAN, GRMN, HRL, OXY, RIO, TAP, VALE, WING

Reserve Bank of New Zealand Monetary Policy Announcement

Japan – Exports, Imports for January

U.K. – CPI for January (2 a.m.)

U.S. - MBA Mortgage Applications (7 a.m.)

U.S. – Durable Goods Orders for December (8:30 a.m.)

U.S. – Building Permits, Housing Starts for December (8:30 a.m.)

U.S. – Industrial, Manufacturing Production for January (9:15 a.m.)

Treasury Auctions $16 Billion in 20-Year Bonds (1 p.m.)

Fed Meeting Minutes (2 p.m.)

U.S. – Treasury International Capital Net Long‑Term Transactions for December (4 p.m.)

U.S. - American Petroleum Institute Crude Oil Inventory Data (4:30 p.m.)