January CPI Report to Provide Insight Into Fed’s Battle Against Inflation

Economists are expecting that the Consumer Price Index (CPI) will show a 0.5% increase in January, translating into 6.2% annual growth, according to a survey conducted by Dow Jones.[0] Excluding food and energy, so-called core CPI is projected to rise 0.4% and 5.5%, respectively.[1] This would be the biggest monthly increase since October.[2] Federal Reserve Chair Jerome H. Powell has acknowledged the presence of “disinflation” in the US economy.[3] However, the strength of the jobs market has worried some Fed officials, who are concerned that the tight labor market will lead to wage rises and will feed inflationary pressures.[4]

The January CPI report will be closely watched, as it will provide market participants with another reading into how the Federal Reserve is faring in its battle against inflation.[5] According to the Cleveland Federal Reserve’s “Nowcast” tracker, the Consumer Price Index (CPI) is projected to rise by 0.65% on a monthly basis and 6.5% year-over-year.[2] The forecast for the core is 0.46% and 5.6%.[6] A New York Federal Reserve consumer survey showed that expectations for inflation in 2023 were unchanged from 5% in December.[7] The New York Fed reported that the anticipated rate of inflation three years in the future was 2.7%, while inflation was forecast to be 2.5% five years from now.[8]

The Federal Reserve has increased rates for eight consecutive times in a period of less than twelve months, increasing by a quarter of a percentage point most recently; this is a slower pace than in nearly all of 2022.[9] It is predicted that the Federal Reserve will up their benchmark interest rate two times from the current 4.5%-4.75% target range.[6] This would equate to a further 0.5%, or 50 basis points.[6] Market analysis suggests that the Federal Reserve will ultimately settle at a rate of 5.18%.[6]

On Monday, the yield on the 10-year U.S. Treasury dropped to 3.71%. Monday saw a less than 1% drop in oil prices, temporarily halting the significant recovery which had taken place the week prior.[10] Futures of West Texas Intermediate were trading at slightly more than $79 per barrel.[10] On Tuesday, yields from the U.S. Treasury decreased as people in the investing world awaited the most recent consumer price index report and assessed the economic outlook. The 10-year Treasury yield was down 2 basis points 3.69%. The 2-year yield dipped 3 basis points to 4.51%.[0]

0. “Nasdaq, S&P futures point up as traders bet on on Valentine’s CPI treat” Seeking Alpha, 14 Feb. 2023, https://seekingalpha.com/news/3935572-nasdaq-sp500-dow-jones-stock-market

1. “EURUSD runs up to the 200 hour MA ahead of the CPI. The key technicals ahead of CPI data.” ForexLive, 14 Feb. 2023, https://www.forexlive.com/technical-analysis/eurusd-runs-up-to-the-200-hour-ma-ahead-of-the-cpi-the-key-technicals-ahead-of-cpi-data-20230214/

2. “Markets Brief: January CPI Report Forecasts Show a Bump in the Road to Lower Inflation” Morningstar, 10 Feb. 2023, https://www.morningstar.com/articles/1136947/markets-brief-january-cpi-report-forecasts-show-a-bump-in-the-road-to-lower-inflation

3. “Consumer prices rose 6.4% in January” Fox Business, 14 Feb. 2023, https://www.foxbusiness.com/economy/will-cpi-reinforce-powells-disinflation-view

4. “US inflation eases again for seventh consecutive month” The Guardian, 14 Feb. 2023, https://www.theguardian.com/business/2023/feb/14/us-inflation-eases-seventh-consecutive-month

5. “CPI expected to jump M/M in January but cool Y/Y; don’t expect a Fed pivot” Seeking Alpha, 13 Feb. 2023, https://seekingalpha.com/news/3935369-cpi-expected-to-jump-in-january

6. “Inflation report due Tuesday has the potential to deliver some bad news” CNBC, 13 Feb. 2023, https://www.cnbc.com/2023/02/13/inflation-report-due-tuesday-has-the-potential-to-deliver-some-bad-news.html

7. “What consumers expect on inflation” Axios, 14 Feb. 2023, https://www.axios.com/2023/02/13/consumer-inflation-expectations-fed

8. “Inflation continued to cool in January” ABC News, 14 Feb. 2023, https://abcnews.go.com/Business/inflation-data-show-prices-eased-amid-hot-jobs/story?id=97079985

9. “CPI: Prices rise 6.4 percent in January, seventh month of easing inflation” The Washington Post, 14 Feb. 2023, https://www.washingtonpost.com/business/2023/02/14/inflation-easing-cpi-january/

10. “Dow Jones Surges 376 Points Into Key CPI Inflation Report; What To Do Now” Investor’s Business Daily, 14 Feb. 2023, https://www.investors.com/market-trend/stock-market-today/dow-jones-rallies-376-points-into-key-cpi-inflation-report/