Source: Jinshi Data

At 9:30 PM Beijing time on Friday, the U.S. Bureau of Labor Statistics will release the January Consumer Price Index (CPI) report, which is expected to see the slowdown in service price growth likely contribute to a cooling of January inflation. However, it is still too early to expect this to change the Federal Reserve's policy thinking.

Consensus forecasts from economists indicate that the January 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, slowing from the previous month's 2.7%, while the month-on-month growth rate is expected to remain at 0.3%. The core CPI, excluding food and energy, is also expected to rise 2.5% year-on-year, lower than the previous value of 2.6%, with the month-on-month growth rate possibly increasing slightly from 0.2% to 0.3%.

If the data meets expectations, the overall CPI in the U.S. will have fallen to its lowest level since May 2025 (one month after the Trump administration implemented the "liberation day" tariff policy), indicating that inflation has continued to decline since peaking at just above 3% in September of last year.

It is worth noting that the CPI has been below Wall Street expectations for three consecutive months. If the January data remains moderate, it will provide more confidence to Federal Reserve policymakers that they can lower the benchmark interest rate while avoiding a resurgence of inflation.

Wall Street Expectations: Is the Inflation Data Just a Temporary Decline?

Citigroup economist Veronica Clark pointed out that the slowdown in housing costs (classified as services) is expected to suppress overall service prices; however, commodity prices might be relatively strong, reflecting "the transmission of tariff costs from enterprises' price increases at the beginning of the year."

Goldman Sachs estimates that tariffs will contribute 0.07 percentage points to core inflation, potentially exerting upward pressure on categories such as clothing, entertainment, household goods, education, and personal care. However, Goldman Sachs forecasts that the overall CPI for January will only be 2.4% year-on-year, slightly below market expectations, which may further enhance expectations of a slowdown in inflation.

However, Goldman Sachs economists noted that slight price increases by businesses at the beginning of the year could put some pressure on Friday's CPI data; although the overall service price growth has slowed, travel-related components such as airfare and hotel rates may be exceptions.

Some economists do not believe that the decline in inflation is sustainable, with some even suggesting that the January data may be stronger than expected.

Economists at Royal Bank of Canada (RBC) expect that the core CPI in January will increase by 0.4% month-on-month and maintain a year-on-year growth rate of 2.6%, higher than the market expectations of 0.3% and 2.5%.

"January has typically seen higher inflation due to business price increases and lingering seasonal factors since 2021," wrote RBC's U.S. economic head Mike Reid. He also expects early signs that wholesalers will start passing on tariff-related costs to consumers.

Previously, both the manufacturing and services PMI from the Institute for Supply Management (ISM) showed persistent price pressures; the Adobe Digital Price Index also indicated a significant increase in online commodity prices last month.

Omair Sharif, founder of Inflation Insights, also reminded that due to the Bureau of Labor Statistics readjusting seasonal factors, the January data will be harder to interpret than usual, and investors should not underestimate any unexpected results. He pointed out that core inflation surged in January 2024 and 2025, attributed at the time to "residual seasonality," but the real reason was extraordinary price increases.

Some forecasters believe that the January decline in inflation may be the last wave of good news for a while. After this, the Trump "Big and Beautiful" tax cut policy will gradually take effect, coupled with the additional stimulus from the Federal Reserve's three rate cuts last year, injecting more funds into the economy.

Economists at Wells Fargo Securities wrote in their comments: "Although the overall and core CPI in January is expected to decline slightly year-on-year, we do not expect inflation in 2026 to significantly cool further, as loose fiscal and monetary policy will support demand."

What is the Impact on the Federal Reserve's Policy Outlook?

Federal Reserve policymakers will closely monitor the upcoming inflation data. There is no doubt that internal debates among officials have become public. Although Trump continues to pressure the Federal Reserve for significant rate cuts, policymakers still struggle to reach a consensus on whether to restart rate cuts like at the end of last year to support the job market or to maintain high interest rates longer to push inflation back to the 2% target.

The FedWatch tool of the CME Group shows that the market expects the Federal Reserve to maintain a "wait-and-see" mode at least until July. It will be difficult for this expectation to change significantly based on the actual CPI data.

Stephen Juneau, a U.S. economist at Bank of America Securities, noted that even if the data performs well, the current impact on the Federal Reserve may be limited. The next meeting of the Federal Open Market Committee (FOMC) will take place on March 17-18.

"Although inflation has been above the Federal Reserve's 2% target for nearly five years, employment data has overshadowed inflation and become the focal point of policy," Juneau wrote. "Unless there are clear signs of a re-acceleration of demand-driven inflation or inflation expectations spiral out of control, the Federal Reserve will focus more on labor market dynamics." The strong employment data released on Wednesday (with nonfarm payrolls increasing by 130,000 in January and the unemployment rate falling to 4.3%) triggered a slight market correction, as the market speculated that a robust labor market might hinder the Federal Reserve from cutting rates.

Tom Lee, head of research at Fundstrat Global Advisors, believes that a decline in inflation to 2.5% would align with pre-pandemic levels, comparable to the average levels from 2017-2019.

"Even if the effects of tariffs are still reflected in the data, this is part of a 'normal' inflation environment," Lee stated in the report. The current target range for the federal funds rate is 3.5%-3.75%, far above pre-pandemic levels, "the Federal Reserve has ample room to cut rates."