January CPI to Test Inflation Pressures Amid Rate Cut Speculation

The release of January's Consumer Price Index (CPI) on Wednesday, February 15th, will provide insights into the ongoing debate over inflation and potential interest rate changes by the Federal Reserve in 2025.

Consensus Estimates

Economists anticipate headline inflation to reach 2.9%, matching the annual gain seen in December. Consumer prices are expected to have increased 0.3% over the prior month, a slight decline from December's 0.4%.

On a core basis, excluding food and energy, prices are projected to have climbed 3.1% over last year, marking the lowest level since April 2021. This would represent a decrease from the 3.2% seen in December and the first year-over-year deceleration since July 2021.

Monthly core price increases are estimated at 0.3%, marginally higher than the prior month's 0.2%, according to Bloomberg data.

Factors Influencing Inflation

Core inflation has remained elevated due to rising costs for shelter, insurance, and medical care. These trends are expected to continue, with core services likely ticking higher in January and prices of certain core goods, such as used cars, remaining elevated.

"We anticipate an increase in core goods prices, largely due to new and used cars," analysts at Bank of America noted ahead of the report. "Outside of autos, we generally see core goods prices falling given an improving supply backdrop."

Rental prices are expected to stay mostly unchanged from December, while owners' equivalent rent (OER) could increase slightly to 0.4% from the prior 0.3%.

Impact of Trump's Presidency

Despite the slowing inflation trend, it remains above the Federal Reserve's 2% target on an annual basis. The Trump administration's policies, including trade tariffs, fiscal measures, and immigration changes, could potentially reignite inflationary pressures.

Analysts at Bank of America believe that "the Trump Administration's trade, fiscal and immigration policy agenda would be mildly inflationary." They anticipate the impact of policy changes to manifest in the second half of 2025, although additional tariffs in the coming weeks could accelerate the timeline.

Sentiment and Expectations

Recent consumer surveys have indicated some pessimism over the inflation outlook, with the University of Michigan one-year inflation expectations jumping to their highest since November 2023.

However, market-based measures of inflation expectations remain within historical ranges. The 10-year breakeven inflation rate stood at 2.4% as of Monday, near its highest levels of the year but within a stable range between 2% and 2.4% over the past two years.

Federal Reserve's Response

Federal Reserve officials have acknowledged the elevated inflation levels but have expressed a cautious approach to rate cuts. Chicago Fed president Austan Goolsbee emphasizes the importance of market-based data, which has remained anchored near the Fed's target.

Dallas Fed president Lorie Logan, however, has suggested that rising inflation would warrant further monetary tightening, while Fed Chair Jerome Powell has indicated that the central bank is in no rush to lower interest rates.

The January CPI report will provide crucial insights into the trajectory of inflation and the potential implications for the Federal Reserve's monetary policy decisions in 2025.