January CPI Report: Inflation Eases, but Core Prices Remain Elevated
The upcoming Consumer Price Index (CPI) report on Wednesday will shed light on whether inflation pressures are abating. Economists anticipate a 2.9% headline inflation rate and a 0.3% monthly increase, matching the pace observed in December.
Core inflation, excluding food and energy, is projected to climb 3.1% year-over-year, its slowest pace since April 2021. This represents a decline from December's 3.2% and signals a moderation in price growth.
However, core inflation remains stubbornly high due to elevated shelter, insurance, and medical care costs. Analysts anticipate further price increases in core services and used cars.
Despite easing inflation, the Federal Reserve's 2% target has not been consistently met. The return of Donald Trump to the presidency has introduced uncertainty, as his protectionist trade policies may reignite inflationary pressures.
Economists believe Trump's policies could have a mild inflationary impact, particularly in the second half of 2025. Recent tariffs on steel, aluminum, Mexico, and China raise concerns about their potential effects on inflation expectations.
Market-based inflation measures remain within historical ranges, but consumer expectations are at risk of de-anchoring. The University of Michigan's consumer sentiment survey indicated a decline in optimism and a rise in inflation expectations.
Nevertheless, Federal Reserve officials remain cautious, emphasizing the need to monitor inflation closely. President Austan Goolsbee has emphasized the importance of relying on market-based data, which has been stable at around the 2% target.
While the 10-year breakeven inflation rate has climbed recently, it remains within a two-year range of 2%-2.4%. However, Dallas Fed President Lorie Logan has cautioned that higher inflation would necessitate further tightening of monetary policy.
The CPI report will provide crucial insights into the trajectory of inflation and the Fed's potential rate-cutting path in 2025.