The U.S. labor market has shown signs of cooling down, leading to increased scrutiny of upcoming economic indicators, particularly the Consumer Price Index (CPI) data. Recently, Federal Reserve Chair Jerome Powell emphasized the importance of monitoring inflation and indicated that the economy remains robust, sending mixed signals to markets bracing for potential interest rate adjustments. The CPI report is about to be released, and it carries significant weight in shaping future monetary policy.
Despite assurances from the Federal Reserve that inflation is under control, the core inflation rate continues to linger above the crucial 3% threshold. Various factors, including the implementation of new tariff policies and recent increases in energy and major food prices, have contributed to a heightened sense of uncertainty in the market. Analysts and investors are now eagerly awaiting any signs of "overheating" in inflation as the data is set to drop later today.
The U.S. Bureau of Labor Statistics is scheduled to release the January CPI report at 21:30 ET, and expectations are running high. Analysts predict a month-over-month increase in CPI of around 0.3%, a slight dip from the previous month’s growth of 0.4%. On a year-over-year basis, CPI is expected to rise by 2.9%, consistent with last month's figures, while core CPI may increase by 0.3% month-over-month, a rise compared to December's 0.2%. Notably, Goldman Sachs has forecast a slightly higher core CPI month-over-month growth rate of 0.34% and a year-over-year growth of 3.19%.
It is also important to note that this month's CPI figures will incorporate two substantial annual updates, which include adjustments for seasonal variations and weighting metrics. These adjustments could potentially influence the data released today. Goldman Sachs has suggested that we may expect monthly inflation rates to stabilize around 0.25% in the coming months; by December 2025, core CPI is anticipated to hover around 2.8%, with the core Personal Consumption Expenditures (PCE) inflation rate resting at about 2.6%.
In a related development, Powell is set to deliver a semi-annual monetary policy testimony at 23:00 ET before the House Financial Services Committee. His statements during this appearance may provide additional clues regarding the trajectory of monetary policy for this year. During his recent Senate confirmation, Powell reiterated that the economy is strong and emphasized that the Fed aims to continue making progress in reducing inflation. He indicated there’s no rush to cut interest rates, affirming that the policy is well-prepared to handle risks and uncertainties that could arise; particularly, he downplayed the labor market's influence as a significant inflationary pressure.
Analysts note that there is a psychological factor at play given that January data often surprises Wall Street with unexpected increases. Several key indicators have spiked in recent weeks, with energy prices rebounding sharply and specific food items such as eggs seeing significant price hikes. Goldman Sachs posits that the overall CPI could reflect an increase of approximately 0.36%, with a yearly rise of 2.96%. While last month’s CPI report fell short of what was anticipated, there are concerns that January’s figures may see consecutive low readings. Factors contributing to potential inflationary pressures include the resurgence in energy prices, surging grocery costs, and a bolstered stock market which enhances wealth effects.
Historical data indicates that January CPI readings frequently exceed market expectations. Goldman Sachs does suggest a tempered “January effect” this year due to prior alleviation of price pressures. However, they still caution that the risks surrounding inflation moving upwards are palpable.
In their latest report, the Goldman Sachs team led by Jan Hatzius highlighted three sectors that may dominate January CPI trends: automobile prices, insurance costs, and communication services. For automobile prices, used car prices are expected to climb by 1.5%, a bump up from December’s 1.2%, while new car prices may see a 0.5% increase, influenced by diminished sales incentives. In terms of auto insurance, the growth in premiums could increase from 0.4% to 0.75%, representing the pressures of lagging repair and litigation costs. Communication services might also experience a reverse in the deflationary trend due to seasonal adjustments and postal rate increases, with expectations of a 0.5% rise.
Moreover, Goldman Sachs anticipates a moderation in airfare inflation for this month and a slight easing in shelter rents which includes owner-equivalent rents. Over the next few months, they expect the monthly CPI inflation rate will hover around 0.25%. By December 2025, projected core CPI inflation may drop around 2.8%, consistent with core PCE inflation nearing 2.6%.
The upcoming CPI report is expected to usher in two critical adjustments. The first adjustment involves seasonal factors based on price volatility data from 2024, which could potentially temper last year's alarming seasonal fluctuations in core inflation. Historical patterns suggest that the first annual revision typically offsets about 20% of monthly data discrepancies. The second adjustment relates to a consumer spending survey conducted in 2023 that recalibrates the consumption weights applied in the calculations. Nonetheless, Goldman Sachs notes that changes in consumer structure in 2022 limit significant impacts on these updated weights.
The market is bracing itself as the release of the CPI is anticipated to have rippling effects across financial landscapes. Should the CPI data exceed expectations, it could considerably constrain the Federal Reserve’s latitude to execute future interest rate cuts, placing downward pressure on the stock market and potentially bolstering the strength of the U.S. dollar.
Regardless of whether the January CPI data makes headlines, the market has entered a period of heightened volatility. The implied volatility from options on the S&P 500 indicates approximately 1.3% market movement anticipated following tonight's CPI release, marking the largest implied volatility since the regional bank crisis of 2023.
A critical aspect to consider is the impact of this CPI report on the U.S. Treasury market. According to Goldman analyst Paolo Schiavone, the results will play a pivotal role in the ongoing battle between bull and bear trends in the bond market. If a bull market emerges, it could be influenced by factors such as the issuance of new bond products and potential regulatory relaxations. Conversely, concerns about inflation pressure and upcoming issuance schedules could keep the bear market in play.
Following Powell’s overnight assertion that the Fed is in no rush to cut rates, Treasury yields climbed across the board, with the yield on the 10-year note nearing 4.55%, a rise of four basis points. The swap market currently anticipates that the remaining cut scope for the Fed’s ongoing policy cycle will amount to less than two 25-basis-point reductions.
Additionally, the U.S. government is set to auction approximately $67 billion in 10-year and 30-year bonds this week, a move that will likely have significant implications for the bond market.
Last month’s slightly easing inflation data contributed to a rebound in U.S. Treasuries. However, growing apprehensions from investors and consumers regarding the new tariff policies, alongside a ratcheting-up of trade tensions, are expected to exacerbate inflation in the months ahead; this could constrain the upside potential in the bond market.