Is a Second Wave of Inflation Looming in the U.S.? CPI Leading Indicators Surge Beyond Expectations, Threatening the Fed's Rate Cut Plans.

On January 7, data revealed that the U.S. December Services PMI hit 54.1, the highest level since early 2023, exceeding both the forecasted 53.5 and November's 52.1.

The PMI index serves as a leading indicator of inflation (CPI). When PMI data exceeds expectations, it suggests robust economic activity and upward pressure on prices, and vice versa. Historical data supports this correlation.

In the chart below, the blue line represents the Services PMI, while the green line shows the CPI index. The two exhibit a high degree of correlation. Currently, the indicator measuring input prices for materials and services has surged over six points to 64.4. Based on past trends, this suggests U.S. CPI could breach 3% again, with core CPI (excluding volatile food and energy prices) potentially climbing to 3.5%–4.0%.

Labor Market Resilience and Inflationary Pressures

Released alongside the Services PMI, the November JOLTS Job Openings data also exceeded expectations, indicating a resilient labor market. This reinforces the wage-price spiral, which continues to drive inflation.

Another notable metric is the truckload tender rejection rate, which surpassed 10% during the 2024 Christmas season for the first time since April 2022. This suggests a booming freight market, signaling upward price pressures.

The tender rejection rate reflects the heat of the freight market. Before conducting business, shippers and carriers negotiate pricing. Shippers compete with higher offers in a hot market, and carriers may cancel previously agreed contracts to accept more lucrative ones. A rising rejection rate indicates a strong economy and a freight market where carriers hold bargaining power. Conversely, a declining rate points to economic weakness and reduced carrier leverage.

Implications for the Fed's Policy Path

With multiple CPI leading indicators surpassing expectations, the risk of an inflation rebound in the U.S. has increased significantly. This complicates the Federal Reserve's plans to cut rates. Minutes from the December Fed meeting revealed that nearly all participants expressed concerns about rising inflation risks, emphasizing that it could take longer to bring inflation back to the 2% target.

Should inflation resurge, the Fed may significantly slow its rate-cutting trajectory, potentially halting cuts altogether or even resuming hikes.

Global Parallels

The U.S. isn't alone in facing these challenges. Other advanced economies are experiencing similar risks. According to a chart analyzing global trends, while developed economies collectively embarked on a rate-cutting cycle in 2024, the pace of cuts is expected to slow substantially in 2025, with rates still trending downward but at a much more measured pace.