January CPI inflation report is due out Friday. Here’s what’s expected
Investors received encouraging news this week regarding the labor market, with further insights expected on Friday regarding inflation. The consumer price index (CPI), a key measure of goods and services costs in the U.S. economy, is projected to show a 2.5% increase from a year ago in the January release. If this forecast holds true, it would bring the CPI back to its level from May 2025, following President Donald Trump’s implementation of “liberation day” tariffs.
In December, the headline CPI stood at 2.7% and has been steadily decreasing since peaking at just above 3% in September. Excluding food and energy, core CPI was at 2.6% in December, with both measures expected to show a 0.3% monthly increase in January.
It is important to note that the CPI has consistently fallen below Wall Street’s expectations for the past three months. A lower reading for January could potentially give the Federal Reserve more confidence in lowering its benchmark borrowing rate without triggering another surge in inflation.
Tom Lee, head of research at Fundstrat Global Advisors, highlighted that achieving a 2.5% inflation rate would align with pre-pandemic price levels and the average from 2017-2019. With the current fed funds rate between 3.5%-3.75%, significantly higher than pre-pandemic levels, Lee believes the Fed has ample room to implement rate cuts if needed.
Goldman Sachs anticipates a 0.07 percentage point contribution to core inflation from tariffs, with potential upward pressure on categories such as clothing, recreation, household furnishings, education, and personal care. However, Goldman predicts that the headline CPI may come in slightly below expectations at 2.4%, suggesting a moderation in inflation.
Following a robust jobs report on Wednesday, which revealed nonfarm payroll gains of 130,000 for January and a decrease in the unemployment rate to 4.3%, there were concerns that a strong labor market would deter the Fed from implementing rate cuts. Nonetheless, a lower-than-expected inflation reading could alleviate these worries.
“A dovish Fed is supportive of stocks, and this is why in our base case of a ‘3 phase market,’ we see stocks exiting the year strongly,” Lee commented.
The Bureau of Labor Statistics is scheduled to release the inflation report on Friday at 8 a.m. ET. Investors and economists will closely analyze the data for further insights into the state of the economy.
