On the 12th of January, the United States is set to announce the Consumer Price Index (CPI) for the month of JanuaryThis comes after three consecutive months of rising prices, and the market generally anticipates that the overall year-on-year CPI growth rate will stabilize, although a slight acceleration in the month-on-month core CPI is expectedDespite the Federal Reserve's belief that inflation is still on the path to the 2% target, recent fluctuations in data have raised concerns among consumersThe looming inflation risks stemming from President’s trade tariffs and tax cut plans may inject further uncertainty into the potential for future interest rate cuts.

The month-on-month core CPI might quicken furtherAnalysts have noted that the primary price data for the first month of 2025 could reflect persistent inflationIt is projected that the overall CPI in January could rise by 2.9% year-on-year, with the impact of gasoline prices easingHowever, costs for electricity and utilities may see an uptick due to cold weatherMeanwhile, food inflation is expected to continue rebounding, with prices of eggs, beef, and other products showing significant strength at year-end.

Last month, the U.SDepartment of Labor reported that the CPI rose by 2.9% year-on-year in December, marking a 0.2 percentage point increase from the previous month and the largest increase in five monthsOn a month-to-month basis, it grew by 0.4%, a slight acceleration of 0.1 percentage points compared to November.

Excluding the more volatile food and energy components, the core CPI is expected to increase by 3.2% year-on-year, unchanged from the previous period, while showing a month-on-month increase of 0.3%, which is an acceleration of 0.1 percentage points.

Rental prices, which account for one-third of the CPI and have been a key driver of core inflation in recent years, are showing signs of coolingAlthough rent growth in the market has slowed, official data tends to lag, and forecasts suggest that the month-on-month increase in the housing component could remain elevated at around 0.4% to 0.5%, continuing to exert pressure on core CPI.

The inflationary pressure from core goods is also diminishing

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In the automotive sector, used car prices have risen slightly, whereas new car prices have remained stableStrength in demand for services such as healthcare and travel is likely to contribute to a 0.1 percentage point acceleration in core service inflation, potentially rising to 0.4%. Prices in sectors like education and communication have rebounded, especially as certain components have experienced month-to-month volatilityFurthermore, businesses may adjust prices at the beginning of the year as some service sectors update their pricing structures, which could lead to persistent core service inflation.

In a report sent to journalists, Wells Fargo predicted that inflation will likely plateau for the remainder of this year as any further deflationary pressures in the services sector will be offset by higher goods inflation following the imposition of additional tariffsThe bank views the road back to a 2% inflation target as increasingly challenging, suggesting that the risks are on the riseThe elevated tariffs promised by the president during his campaign have become a reality; although the 25% tariff threats against Mexico and Canada have been postponed by a month, the final decisions still compel businesses to consider higher input and product costs, leaving little room for pricing concessions.

The policy outlook remains ambiguousThe Federal Reserve has chosen to remain stagnant in its January meeting, proceeding cautiously towards potential future interest rate cutsThe recent employment data suggests stability in the labor market; alongside escalating tariff risks and inflation expectations, the Fed's easing cycle may be suspended for an extended period.

A consumer survey from the University of Michigan released on the 7th of this month revealed a drop to a six-month low in the sentiment index for February, continuing the trend of significant declinesOf particular concern is the 1-year inflation expectation, which surged from 3.3% to 4.3% in February, reaching a peak since November 2023, while long-term inflation expectations have risen to the highest levels since the 2008 financial crisis.

Market analysts believe that the heightened consumer anxiety is closely linked to the inflation threats posed by the president’s tariffs

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Boris Schlossberg, a macro strategist at BK Asset Management, noted in an interview that while the Federal Reserve is awaiting the government’s decisions regarding tariffs before recalibrating its policies, the changes in inflation expectations are indeed concerningThese fluctuations may manifest in reduced demand among consumers, potentially impacting economic expansion.

A recent study from the Boston Fed indicated that the tariffs imposed on Mexico, Canada, and China could influence the latest U.S. core Personal Consumption Expenditures (PCE) inflation by approximately 0.5 to 0.8 percentage points, depending on the responses from domestic importers.

There is also growing recognition of these associated risks within the Federal ReserveLast week, Charles Evans of the Chicago Fed cautioned that tariffs could extend to more countries or a broader range of goods, or they could be levied at higher rates, whereupon the impacts could escalate and become more persistentHe indicated that tariffs could also disrupt supply chainsThe rush to find new, reliable suppliers often leads to increased prices.

Federal funds futures indicate that the Fed’s first interest rate cut could occur no earlier than July of this year, with approximately 40 basis points of policy room available for the entire yearSchlossberg remarked that it seems the Fed's focus is shifting back from employment to pricesIf both factors remain stable moving forward, the urgency for further easing appears limitedGiven the uncertainty surrounding the implementation of tariffs and their subsequent effects, waiting to observe developments seems like the most prudent approach for the Federal Reserve.

Scheduled for next Tuesday and Wednesday, Federal Reserve Chair Jerome Powell is expected to testify before CongressHow he navigates calls from Republican members for rate cuts and whether he can provide more insight into future policy directions will undoubtedly capture market attention.

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