Forecasts for January CPI Report Show Inflation Remaining Sticky

Key Takeaways

• CPI inflation is expected to remain slightly elevated in January, partly thanks to rising prices in the core goods and food categories.
• Several months of strong labor market data mean the Federal Reserve has leeway to keep interest rates steady.
• Markets see only a slim chance of a rate cut in March.

Forecasts for the January Consumer Price Index Report find that inflation likely remained slightly elevated last month, partly thanks to rising prices for core goods like new and used cars.

The inflation rate has fallen dramatically from its peak in 2022 but has not yet returned to the Federal Reserve’s target. Complicating the picture are the uncertain impacts of new policies under the Trump administration, like tariffs, which could exacerbate inflationary pressures in the months ahead. In the meantime, analysts say a healthy labor market is giving Fed officials the confidence to hold interest rates steady while they await more data on the path of inflation and clarity around policy in Washington.

Overall, economists expect that consumer prices rose 0.3% on a monthly basis in January, according to FactSet’s consensus estimates. That would mean the annual inflation rate held steady at 2.9%. Economists expect that the core measure of inflation, which excludes volatile food and energy prices, rose 0.3% on a monthly basis and 3.1% on an annual basis.

A Cautious View on Inflation

Josh Hirt, senior US economist at Vanguard, says he’s remaining cautious. Monthly inflation data in the first months of the year will likely come in lower, thanks to what analysts call base effects—stronger readings at the start of 2024 make today’s data look softer. At the same time, inflation on a month-to-month basis appears to be normalizing at levels close to the Fed’s target. “That’s a very positive development,” he says. Pressure on inflation from rising housing and rent prices is also beginning to ease.

On the other hand, Hirt points to headwinds from new tariffs and wage growth still running hot. Those factors could keep inflation elevated in the coming months. Hirt is expecting 0.27% core inflation for January, which includes the likely effect of annual seasonal adjustments to the data released this month. He expects the headline inflation number to be in line with December’s reading as pressures from rising energy prices ease compared with last month.

January CPI Report Highlights

• CPI report release date and time: Wednesday, Feb. 12 at 8:30 a.m. EST
• The CPI is forecast to rise 0.3% in January after rising 0.4% in December.
• Core CPI is forecast to rise 0.3% in January after rising 0.2% in December.
• The CPI year over year is forecast to rise 2.9% in January after rising the same amount in December.
• Core CPI year over year is forecast to rise 3.1% in January after rising 3.2% in December.

Overall, analysts expect an uptick in new- and used-car prices to push the core inflation rate higher in January. They see ongoing upward pressure on the services side of the equation (which includes housing) and expect food and energy prices to continue rising.

“The rebound in food inflation since the summer … is likely to continue amid the recent months’ rise in food-related commodity prices generally and egg prices particularly,” Wells Fargo economists wrote last week. They note that energy services prices are likely to see a sizable increase for the month, thanks to a spike in natural gas prices, while energy goods prices (including gasoline) will see more muted gains.

When Will the Fed Cut Rates?

With inflation sticky, market participants have been steadily paring back their expectations for an interest-rate cut at the central bank’s next meeting in March. After reducing rates by a full percentage point during 2024, the Fed left its target range at 4.25%-4.50% in January.

Strong labor market data released last week helped cement the case for holding steady next month. “That’s going to give the Fed the ability to have some patience,” Hirt says. A resilient job market means higher rates have not yet damaged the economy, so central bankers can afford to pause until they see more signs that inflation is falling back to target.

Bond futures markets now show an 8.5% chance of a 0.25-percentage-point cut in March, according to the CME FedWatch tool. That’s down from 14% odds a week ago and 24% a month ago. Investors are pricing in a roughly 43% chance of a cut at the June meeting.

Some strategists have suggested the Fed won’t cut this year at all. “The January jobs report underscored the resilience of the US labor market, and we remain comfortable with our forecast that the Fed cutting cycle is over,” Bank of America economists wrote in a note to clients this week. “Inflation is stuck above target, with risks skewed to the upside, activity is strong, and the labor market appears to have stabilized around full employment.”