The January consumer price index (CPI) report is poised to reveal persistent inflation challenges as it deviates from the Federal Reserve's (Fed) objectives. Economists anticipate a 0.3% monthly increase in the all-items index, with a 12-month inflation rate projected at 2.9%, mirroring December's figures. This scenario underscores the ongoing struggle to align with the Fed's 2% inflation target.
The National Federation of Independent Business survey for January highlighted a shift in small business concerns, with only 18% identifying inflation as their primary issue—the lowest since November 2021. Meanwhile, the Cleveland Federal Reserve's first-quarter Survey of Firms' Inflation Expectations forecasted a 3.2% CPI rate over the next 12 months, suggesting a prolonged inflationary environment.
Despite expectations of moderate downward pressure in airfares and rent-related categories—key contributors to inflation—economists foresee limited relief. The rent-related categories, comprising about one-third of the CPI weighting, have significantly impacted inflation's persistence above the Fed's target.
Goldman Sachs economists highlighted potential inflationary pressures stemming from President Donald Trump's tariffs, which could counteract the anticipated disinflationary trends. They noted:
"Going forward, we see further disinflation in the pipeline over the next year from rebalancing in the auto, housing rental, and labor markets, but an offset from an escalation in tariff policy," – Goldman economists
Bank of America and Dow Jones aligned in their forecasts, predicting a 0.3% monthly increase for January CPI and a sustained 12-month inflation rate of 2.9%. Core readings are expected to reflect similar trends at 0.3% and 3.1%, respectively. Goldman Sachs identified car prices, auto insurance, and communications as likely drivers of these increases.
Beth Hammack emphasized the importance of actual data over forecasts:
"While monetary policy needs to be forward-looking in nature, forecasts are no substitute for realizations. Or as they might have put it in Jerry Maguire, 'show me the low inflation,'" – Beth Hammack
Amid these expectations, Bank of America's economists predict that the Fed will maintain its current stance throughout the year and beyond, given persistent inflation and a robust labor market. Stephen Juneau elaborated on this perspective:
"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," – Stephen Juneau
Traders anticipate a potential quarter percentage point rate cut by the Fed in July, followed by a steady approach thereafter, according to CME Group data. However, these actions remain speculative as economic conditions continue to evolve.