January CPI Report: Inflation Pressures Remain Amidst Rate Cut Debate
Headline and Core Inflation Expectations
The Consumer Price Index (CPI) for January will provide insights into the trajectory of inflation as investors analyze the Federal Reserve's rate cut prospects in 2025. Forecasts indicate a headline inflation rate of 2.9%, mirroring the December figure. Consumer prices are estimated to have increased by 0.3% month-over-month, a slight deceleration from the 0.4% increase recorded in December.
On a core basis, excluding volatile food and energy prices, inflation is anticipated to rise 3.1% year-over-year in January, reaching its lowest level since April 2021 and declining from 3.2% in December, marking the first deceleration in annual core CPI growth since July of that year.
Drivers of Inflation
Elevated core inflation is attributed to rising costs in housing and services such as insurance and healthcare. This trend is expected to continue in January, with core services prices rising and prices of certain core goods, like used cars, remaining high.
Bank of America economists project an increase in core goods prices, primarily driven by new and used cars. They anticipate moderate seasonality in January, posing an upside risk to their core goods CPI forecast. However, they expect rental prices to remain relatively stable, while owners' equivalent rent (OER) could rise slightly to 0.4% from 0.3%.
Trump Administration's Impact
Despite the recent slowdown in inflation, it remains above the Federal Reserve's 2% target on an annual basis. The return of Donald Trump to the presidency has added uncertainty, with some economists suggesting that his protectionist trade policies could reignite inflationary pressures.
Bank of America economists believe that the Trump Administration's economic policies could have a mildly inflationary effect, potentially impacting inflation in the latter half of 2025. They highlight the potential impact of additional tariffs in the near future.
Market Expectations and Fed Response
Market-based inflation measures remain within historical ranges, but consumer inflation expectations in surveys show signs of increasing. The University of Michigan consumer sentiment survey indicated a decline in overall sentiment and a jump in one-year inflation expectations.
Federal Reserve officials have downplayed the survey's impact, emphasizing the importance of market-based indicators. The 10-year breakeven inflation rate, a market-based gauge, remains within a stable range around 2.4%.
However, Federal Reserve Bank of Dallas President Lorie Logan and Chairman Jerome Powell have emphasized that rising inflation could necessitate further monetary policy action. Powell stated that the central bank is not in a rush to lower interest rates.