January CPI Report to Gauge Inflation's Path, Fed's Interest Rate Outlook

The release of the January Consumer Price Index (CPI) will scrutinize the recent trend of easing inflation pressures. Investors speculate on the potential for the Federal Reserve to reduce interest rates in 2025, as indicated by the report.

Headline and Core Inflation Projections

The report, scheduled for Wednesday at 8:30 a.m. ET, forecasts a headline inflation rate of 2.9%, matching December's annual increase. Consumer prices are anticipated to rise 0.3% monthly, a modest slowdown from December's 0.4% increase.

On a core basis, excluding volatile food and energy costs, January prices are projected to climb 3.1% over the previous year, the lowest since April 2021. This would also represent a decline from the 3.2% recorded in December, marking the first year-over-year deceleration since July 2021.

Monthly core price increases are expected at 0.3%, slightly higher than the previous month's 0.2%, according to Bloomberg data.

Elevated Core Inflation and Trump Policies

Core inflation remains elevated due to higher shelter, insurance, and medical care costs. This trend is expected to persist in January, with core services likely to increase, while prices for certain core goods like used cars may also remain elevated.

The report anticipates little change in rental prices from December. Owners' equivalent rent (OER), the hypothetical rent a homeowner would pay for the same property, is projected to rise slightly to 0.4%.

The ascension of Donald Trump to the presidency introduces uncertainty into the inflation outlook. Economists argue that Trump's protectionist trade policies could lead to another round of inflation, complicating the Federal Reserve's path for interest rates.

Long-Term Inflation Expectations

While inflation has been slowing, it remains above the Federal Reserve's 2% target. Market-based measures remain within historical ranges, but inflation expectations in the University of Michigan survey indicate potential departure from Fed targets.

Despite sharp increases in the University of Michigan consumer sentiment survey, the 10-year breakeven inflation rate remains relatively stable between 2% and 2.4% over the past two years.

Federal Reserve officials have cautious views on inflation and interest rates. Dallas Fed president Lorie Logan warns of the need for further monetary policy action in case of rising inflation, while Fed Chair Jerome Powell emphasizes that the central bank is in no rush to lower interest rates.