Headline: January CPI report to test inflation easing, but core inflation remains elevated

Introduction:

The January Consumer Price Index (CPI) release on Wednesday will provide insights into whether inflation pressures are abating, as investors speculate about potential interest rate cuts by the Federal Reserve in 2025.

Headline Inflation:

Economists anticipate a headline inflation rate of 2.9%, matching the increase observed in December. Consumer prices are projected to have grown by 0.3% month-over-month, marginally slower than the 0.4% increase in December.

Core Inflation:

Stripping out volatile food and energy prices, core inflation is expected to have risen by 3.1% over the past year, marking its lowest level since April 2021. This represents a slight decline from the 3.2% recorded in December and aligns with the first annual decline in core CPI since July.

Monthly Core Inflation:

Economists predict a monthly core inflation rate of 0.3%, slightly higher than the 0.2% increase in December, according to Bloomberg data.

Persistent Core Inflation:

Stubbornly high core inflation reflects rising costs for shelter and services such as insurance and healthcare. This trend is expected to continue, with core services prices likely to increase modestly in January, while prices for certain core goods like used cars remain elevated.

Bank of America Outlook:

Bank of America analysts anticipate a rise in core goods prices, primarily driven by new and used cars. They note that outside of the automotive sector, core goods prices are generally expected to ease due to improved supply conditions.

Rental Prices:

Rental prices are projected to remain largely stable compared to December. However, owners' equivalent rent (OER) is expected to climb slightly to 0.4% from the previous 0.3%.

Impact of Trump Administration Policies:

Despite the recent slowdown in inflation, it remains elevated compared to the Federal Reserve's 2% target. The return of Donald Trump to the presidency has added uncertainty to the inflation outlook. Some economists argue that Trump's protectionist trade policies could trigger a resurgence of inflation, complicating the central bank's interest rate trajectory.

Market Inflation Expectations:

Market-based inflation measures remain within historical ranges, but inflation expectations in consumer surveys are at risk of rising. The latest University of Michigan consumer sentiment survey indicated a decline in sentiment and a jump in inflation expectations to their highest since November 2023.

Federal Reserve Response:

Federal Reserve officials have downplayed the significance of the surge in consumer inflation expectations and emphasized their commitment to achieving their 2% target. They have also stated they are in no rush to lower interest rates due to persistent inflation concerns.