January CPI may provide further evidence of cooling inflation, but it is unlikely to shake the Fed's stance.

At 9:30 PM Beijing time on Friday, the U.S. Bureau of Labor Statistics will release the January Consumer Price Index (CPI) report. It is expected that a slowdown in service price increases will likely cool inflation in January. However, even so, it is premature to expect this to change the Federal Reserve's policy direction. Economist consensus forecasts indicate that the January CPI, which measures the cost of goods and services across the U.S. economy, is expected to rise 2.5% year-on-year, 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 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 below Wall Street 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 benchmark interest rates while preventing a resurgence of inflation. Wall Street's expectation: Is the inflation data just a temporary decline? Citigroup economist Veronica Clark points out that the slowdown in housing costs (classified as services) is expected to suppress overall service prices; however, commodity prices may be stronger, reflecting "the transmission of tariff costs from New Year's corporate price increases." Goldman Sachs expects tariffs to contribute 0.07 percentage points to core inflation, potentially putting upward pressure on categories such as clothing, entertainment, home goods, education, and personal care. However, Goldman Sachs forecasts that the overall CPI in January will only be 2.4% year-on-year, slightly lower than market expectations, which may further strengthen expectations of a slowdown in inflation. However, Goldman Sachs economists point out that small 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 is slowing, travel-related sub-items such as airfares and hotel prices may be exceptions. Some economists do not believe that the decline in inflation is sustainable, and some even believe that the January data may be stronger than expected. Royal Bank of Canada (RBC) economists 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 year-end price increases by businesses and lagged seasonal factors," wrote Mike Reid, RBC's head of U.S. economics. He also expects early signs to emerge that wholesalers are beginning to pass on tariff-related costs to consumers. Previously, the Institute for Supply Management (ISM) manufacturing and services PMIs both 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," 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. Subsequently, 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 anticipate that inflation will not cool significantly further throughout 2026, as accommodative fiscal and monetary policies will support demand," wrote an economist at Wells Fargo Securities. What will be the impact on the Fed's policy outlook? Fed policymakers will be closely watching the upcoming inflation data. Internal debates among officials have undoubtedly become public. Despite Trump's continued pressure on the Fed to cut rates sharply, policymakers are struggling to reach a consensus: should they restart 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? The CME Group's FedWatch Tool shows that the market expects the Fed to maintain a "wait-and-see" approach until at least July. This expectation is unlikely to change significantly due to actual CPI data. Bank of America Securities U.S. economist Stephen Juneau points out that even with strong data, the immediate impact on the Federal Reserve may be limited. The next Federal Open Market Committee (FOMC) meeting 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," Juneau writes. "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 2017-2019 average. "Even if the impact of tariffs is still reflected in the data, this is a 'normal' inflation environment," Lee 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."