Source: Jinshi Data
At 9:30 PM Beijing time on Friday, the U.S. Bureau of Labor Statistics will release its January Consumer Price Index (CPI) report. A slowdown in service price increases is expected to likely cool inflation in January. However, even so, it is premature to expect this to change the Federal Reserve's policy direction.
Economists’ consensus forecasts indicate that the Consumer Price Index (CPI), which measures the cost of goods and services across the U.S. economy, is expected to rise 2.5% year-on-year in January, a slowdown from 2.7% in the previous month, while the month-on-month growth rate remains at 0.3%. The core CPI, excluding food and energy, is expected to rise 2.5% year-on-year, also lower than the previous value of 2.6%, while the month-on-month growth rate may rise slightly from 0.2% to 0.3%.
If the data meets expectations, the overall US CPI will fall to its lowest level since May 2025 (one month after the Trump administration implemented the "Liberation Day" tariffs), indicating that inflation has continued to decline since its peak of slightly above 3% last September.
It is worth noting that the CPI has been lower than Wall Street's expectations for three consecutive months. If the January data continues to be moderate, it will give Federal Reserve policymakers more confidence that they can lower the benchmark interest rate while preventing a resurgence of inflation.
Wall Street expects: Is the decline in inflation data just temporary?
Citigroup economist Veronica Clark points out that the slowdown in housing cost increases (classified as a service) is expected to suppress overall service prices; however, commodity prices may be stronger, reflecting "the transmission of tariff costs from corporate price increases in the new year."
Goldman Sachs expects tariffs to contribute 0.07 percentage points to core inflation, potentially putting upward pressure on categories such as apparel, entertainment, home goods, education, and personal care. However, Goldman Sachs forecasts that the overall CPI in January will be only 2.4% year-on-year, slightly lower than market expectations, which may further strengthen expectations of a slowdown in inflation.
However, Goldman Sachs economists pointed out that the slight price increases by companies at the beginning of the year may put some pressure on Friday's CPI data; although the overall service price increase has slowed, travel-related sub-items such as airfares and hotel room rates may be exceptions.
Some economists do not believe the decline in inflation will be sustained, and some even think that the January data may be stronger than expected.
Economists at Royal Bank of Canada (RBC) predict that core CPI will rise 0.4% month-over-month in January, while the year-over-year growth rate will remain unchanged at 2.6%, higher than market expectations of 0.3% and 2.5%, respectively.
"Since 2021, January has typically seen higher inflation due to early-year price increases by businesses and lagged seasonal factors," wrote Mike Reid, RBC's U.S. economist director. He also expects early signs to emerge that wholesalers are beginning to pass on tariff-related costs to consumers.
Previously, both the ISM manufacturing and services PMIs showed continued price pressures; the Adobe Digital Price Index also showed a significant increase in online goods prices last month.
Omair Sharif, founder of Inflation Insights, also cautioned that January data would be more difficult to interpret than usual due to the Bureau of Labor Statistics' readjustment of seasonal factors, and investors should not underestimate any unexpected results. He pointed out that the surge in core inflation in January 2024 and 2025 was attributed to "residual seasonality" at the time, but the real reason was extraordinary price increases.
Some forecasters believe that the decline in inflation in January may be the last wave of good news for some time to come. Afterwards, the gradual implementation of Trump's "Big and Beautiful" tax cuts, coupled with the additional stimulus from the Federal Reserve's three interest rate cuts last year, will inject more funds into the economy.
"While overall and core CPI are expected to decline slightly year-over-year in January, we do not expect inflation to cool significantly further throughout 2026, as accommodative fiscal and monetary policies will support demand," Wells Fargo Securities economists wrote in a commentary.
What impact will this have on the Federal Reserve's policy outlook?
Federal Reserve policymakers will be closely watching the upcoming inflation data. Internal debates among officials have undoubtedly become public. Despite continued pressure from Trump for significant rate cuts, policymakers are struggling to reach a consensus: should they resume rate cuts as they did at the end of last year to support the job market, or maintain high interest rates for longer to push inflation back to the 2% target?
CME Group's FedWatch Tool indicates that the market expects the Federal Reserve to maintain a "wait-and-see" approach until at least July. This expectation is unlikely to change significantly due to actual CPI data.
Stephen Juneau, a U.S. economist at Bank of America Securities, points out that even if the data is strong, its impact on the Federal Reserve may be limited at present. The next meeting of the Federal Open Market Committee (FOMC) will be held on March 17-18.
"Although inflation has been above the Fed's 2% target for nearly five consecutive years, employment data has overshadowed inflation and become the policy focus," Juno wrote. "Unless there are clear signs of a renewed acceleration in demand-driven inflation, or inflation expectations spiral out of control, the Fed will pay more attention to labor market dynamics." Strong employment data released Wednesday (130,000 new nonfarm payrolls in January and the unemployment rate falling to 4.3%) triggered a slight market pullback as markets speculated that a robust labor market might hinder the Fed from cutting interest rates.
Tom Lee, head of research at Fundstrat Global Advisors, believes that inflation falling back to 2.5% would be in line with pre-pandemic levels and comparable to the average level of 2017-2019.
"Even though the impact of tariffs is still reflected in the data, this is still within a 'normal' inflation environment," Li stated in the report. The current target range for the federal funds rate is 3.5%-3.75%, well above pre-pandemic levels, and "the Fed has ample room to cut rates."
