On Tuesday, investors will digest one of the most important data points the Federal Reserve will consider in its next interest rate decision: January’s Consumer Price Index (CPI).
The inflation report, scheduled for release at 8:30 a.m. ET, projects headline inflation at 2.9%. A A sharp slowdown from the 3.4% annual gain in December.According to Bloomberg estimates.
If these estimates hold, it would be the lowest annual inflation rate in about three years and the first time since March 2021 that the number has fallen below 3%.
Consumer prices are expected to increase 0.2% monthly, unchanged from December Recently revised Increased monthly.
On a “core” basis that excludes volatile food and gas costs, prices in January are expected to rise 3.7% from last year, a slowdown from December’s 3.9% annual gain, according to Bloomberg data.
Monthly core prices are expected to rise 0.3%, unchanged from the previous month.
Bank of America (BofA) said core inflation remains particularly troublesome due to high home prices and “volatile” categories such as used cars, transportation services and out-of-home accommodation.
“The good news is that given the deflationary rent inflation rate, we Housing inflation is expected to slow this year.”
Bank of America expects that core services will be boosted by sharp increases in transportation services and out-of-town accommodation prices as travel demand “starts the year strong.” At the same time, used car prices should fall by about 1.8%. On a monthly basis, the bank noted.
To hike or not to hike?
Annual inflation remains above the Fed’s 2% target.But the Fed’s preferred inflation indicator, the core PCE price index, has emerged. below this ratio On a six-month annualized basis, that boosted hopes the central bank might start cutting interest rates.
However, Fed Chairman Jerome Powell tempered those expectations. Close possibility The central bank discussed a rate cut in March at its meeting last month, saying it was “probably not the most likely scenario”.
As of Monday afternoon, the market expected that the probability of the Federal Reserve keeping interest rates unchanged in March was close to 85%. According to CME data.
The market generally expects the central bank to start cutting interest rates at its May meeting, and the probability of a rate cut is about 60%.
Bank of America doesn’t expect the Fed’s first rate cut to come until June.
“A report in line with our expectations would continue to bolster confidence in the Fed and support our expectations for a first rate cut in June,” Bank of America economists said.
Fed officials echoed Powell was cautious in his remarks.
“It would be a mistake to lower interest rates too early or too quickly without sufficient evidence that inflation is returning to 2% on a sustained and timely basis,” Cleveland Fed President Loretta Mester said. said in a speech last week.
Minneapolis Fed President Neel Kashkari added that the Fed “Not quite there yet” When it comes to inflation talks, Boston Fed President Susan Collins says she will ‘Need to see more evidence’ Inflation is returning to the Fed’s 2% target.
Both Mester and Collins said a rate cut could come “later this year.”
“The longer the FOMC waits to cut interest rates, the more credible its resolve to fight inflation will be,” UBS Chief Economist Jonathan Pingle wrote in a preview note on Friday. Of course, there are risks to this strategy as inflation expectations are already lower than expected.” Inflation averages 2% and relies on retrospective activity data. “
“Overall, inflation appears to be falling faster than the FOMC expected,” continued the economist, who viewed falling inflation as a “macro theme” for the first half of the year.