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US January inflation preview: further slowdown in price growth keeps rate cut hopes alive


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This month’s consumer price inflation (CPI) is expected to show a further slowing of inflation pressures, but a March rate cut is still very unlikely.

US flagSource: Bloomberg
 

Written by: Chris Beauchamp | Chief Market Analyst, London
 
Publication date: 

Price growth to slow

Consumer price inflation (CPI) is projected to slow in January when the data is released on 13 February, bolstering the Federal Reserve's (Fed) view that cuts will happen this year, though it is unlikely to do much for hopes of a March rate cut.

The headline CPI rate (year-over-year) is expected to dip below 3% for the first time in nearly three years (since March 2021). Most of that deceleration should come from retreating energy prices and a further slide in food inflation.

Home rents drive core inflation

Core CPI, excluding food and energy, is expected at 3.8% year-over-year in January, down slightly from December's 3.9%. But a disproportionate share of that increase still stems from higher home rents. Shelter cost growth will keep slowing as lower market rents gradually pass through into leases. Price increases for goods have fallen back to around zero, as the impact of severe global supply chain strains earlier continues to ease.

Markets are no longer expecting any action from the Fed in March, and even weaker inflation is unlikely to push the chance of a March cut much higher. The CME Fed Watch tool shows just a 15% chance of a March cut, down from 77% a month ago:

CME chartSource: CME Fed Watch

In January, the CPI report is expected to show a moderation in inflation, which could instil confidence among economists. The decline in energy prices and a slowdown in food inflation are likely to contribute to a reduction in the overall inflation rate. However, the persistently high rent increases may prevent a significant drop in the "core" CPI, which excludes food and energy. Core inflation measures are important indicators for policymakers as they provide insights into future price trends.

The upcoming inflation data will be crucial for financial markets, as they hope for relief from the Fed's benchmark interest rate, which has remained at a 23-year high since July. The Fed's rate hikes, initiated in March 2022, were aimed at curbing inflation but led to interest rates on various loans reaching multi-decade highs.

Market participants are eagerly looking for signs of a substantial slowdown in inflation to bolster expectations that the Fed might pause or even reverse some of its aggressive tightening measures. If there is more evidence indicating that underlying price pressures are easing, it could reassure investors that the central bank will not need to maintain restrictive interest rates for as long as previously anticipated.

 

 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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