As investors weigh the timing of potential interest rate cuts by the Federal Reserve in 2025, the Consumer Price Index (CPI) inflation rate for January will offer the latest insight into whether inflationary pressures are easing.
The data, set to be released on Wednesday at 8:30 a.m. ET, is expected to reveal a headline inflation rate of 2.9%, matching the annual increase from December. Consumer prices are forecast to rise by 0.3% compared to the previous month, showing a slight slowdown from December’s 0.4% monthly rise.
Prices are expected to have risen by 3.1% in January compared to the previous year, marking the lowest increase since April 2021 on a “core” basis, which excludes the more volatile prices of food and gas. This also represents a slight decrease from the 3.2% recorded in December, indicating the first slowdown in year-over-year core CPI since July.
Economists anticipate that monthly core price increases will be around 0.3%, which is a slight pickup from the previous month’s figure of 0.2%.
The rising costs of housing and essential services like insurance and healthcare have maintained a consistently high level of core inflation. With core services expected to see an increase in January, while prices for certain core items, like used cars, likely to stay elevated, this trend probably persisted last month.
Prior to the publication, economists Stephen Juneau and Jeseo Park of Bank of America said, “We anticipate an increase in core goods prices, largely due to new and used cars.”
Aside from vehicles, we are generally observing a decline in core goods prices due to a supply situation. However, the moderate residual seasonality in January presents some upside risk to our core goods CPI forecast.
The team anticipates that rental prices will remain relatively stable compared to December. However, it does predict a slight increase in owners’ equivalent rent (OER), which is the estimated rent a homeowner would pay for their own property, rising to 0.4% from the previous 0.3%.
Even though inflation has been slowing down, it still remains above the Federal Reserve’s annual target of 2%.
The prognosis has been further clouded by Donald Trump’s election to the presidency, with some economists speculating that Trump’s commitment to a protectionist trade policy may lead to another spike in inflation in the US. That will probably make the central bank’s future interest rate strategy more difficult.
“We still believe that the Trump Administration’s trade, fiscal, and immigration policies will have a moderate inflationary effect,” wrote Juneau and Park. “The impact of policy changes on inflation is likely to play out in the second half of 2025, although the imposition of additional tariffs in the next few weeks could advance the timeline.”
On Monday, President Trump declared that a global 25% tariff would be imposed on steel and aluminum imports, starting from March 12. Tariffs of 25% on Mexico and Canada are expected to follow next month, while 10% duties on China have already been put in place.
“The crucial question is whether these policy changes will affect long-term inflation expectations,” analysts from Bank of America noted. “While market-based measures are still within the historical range, inflation expectations from the UMich survey could be at risk of rising significantly.”
The latest consumer sentiment survey from the University of Michigan, released on Friday, indicated that overall sentiment has dropped to its lowest point in seven months. This decline was driven by growing concerns about inflation, which caused February’s preliminary reading to fall, while one-year inflation expectations surged to their highest level since November 2023.
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, dismissed the survey’s dramatic rise, saying that it’s important to have a foundation in market-based statistics.
“Those have been firmly anchored at exactly the target the market anticipates,” he stated on Friday. Furthermore, long-term expectations remain unchanged. I think we’re going to return to 2%.
The 10-year breakeven inflation rate was at 2.4% on Monday, close to its highest point this year, but within a band that has been more consistent over the past two years between 2% and 2.4%.
However, Dallas Fed president Lorie Logan warned last week that if inflation increases, “it will be a signal that monetary policy has more work to do.” Powell also stated in his appearance before the Senate Banking Committee on Tuesday that the Fed is not in a rush to cut interest rates.
