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Fed Officials Want Inflation Closer to 2% Target

Fed Chair Jerome Powell said officials need to see more progress on slowing inflation before considering further interest-rate cuts. Core CPI rose by a milder-than-expected 0.2% month-over-month after four consecutive months of 0.3% MoM increases. So instead of looking for hope from the headline readings, which aren’t expected to change much from December, markets will pore through the details for trends that could shed some hope that the Fed eventually will be able to start lowering rates again. Despite already elevated inflation rates, Prestige Economics has forecasted that the January CPI report on February 12 could show decelerations in year-on-year total CPI to 2.5% from 2.9% and core CPI to 3.0% from 3.2%. The coming week’s economic docket includes multiple key growth and inflation reports. Yet Sweet and economist Samuel Tombs of Pantheon Macroeconomics noted the government has faced challenges seasonally adjusting the price data early in the bitbuy review year, overstating price increases.

What economists say

The Consumer Price Index (CPI), due to be released Wednesday, is expected to show prices increased at annual rate of 3.0%, the same as it was in June, according to economists surveyed by The Wall Street Journal and Dow Jones Newswires. For the closely-watched “core” CPI inflation, which strips out volatile food and energy costs, economists expect an annual rate of 3.2%, just a tick down from 3.3% in June. Leave out those prices for food and gas—which can rise and fall for reasons that have little to do with broader inflation trends—and “core” inflation is expected to have stayed at a 3.4% annual increase, the same as in May, according to the median forecast.

What to Expect From This Week’s Inflation Report

Fed Chair Jerome Powell on Tuesday said the central bank is in no rush to cut rates further, while Cleveland Fed President Beth Hammack noted the persistence of inflation that could be exacerbated by tariffs as reason to stay put. « Going forward, we see further disinflation in the pipeline over the next year from rebalancing in the auto, housing rental, and labor markets, but an offset from an escalation in tariff policy, » Goldman economists said in a note. Powell and other Fed officials have said they’re in no hurry to make cuts since the economy isn’t yet cracking under the weight of high interest rates. A report in line with expectations could leave the Fed on track to begin cutting interest rates in June, Juneau and Gapen wrote. Others say the levies could have ripple effects through the economy as they lift consumers’ inflation expectations.

What to Expect From Wednesday’s Closely Watched CPI Inflation Report

This marked the largest jump since 2015, in part due to the ongoing Avian flu. The difference between the January headline CPI and the core CPI was driven primarily by higher energy and food prices. The January 2025 CPI report indicates inflation has ticked up and suggests that the next Fed rate cut may be delayed to the latter half of the year. While the University of Michigan’s consumer survey showed a surprising bump in inflation expectations, other measures indicate the outlook is actually softening. While economists expect a good share of disinflation from some key categories, President Donald Trump’s tariffs could act as an inflationary counterweight. « Inflation is stuck above target, with risks skewed to the upside, activity is strong, and the labor market appears to have stabilized around full employment, » Bank of America economist Stephen Juneau said in a note.

• And with the labor market still chugging along, some economists figure the Fed will forgo rate cuts in 2025.
• Traders started the year anticipating a rapid pace of cuts, then pulled back into expecting only one or two before the latest swing in the other direction.
• But the path down to 2% has hit some roadblocks, and many economists believe Donald Trump’s policies could completely derail it.Less than a month into the Trump Administration, the president has imposed tariffs on foreign trade and has promised more to come.
• While the University of Michigan’s consumer survey showed a surprising bump in inflation expectations, other measures indicate the outlook is actually softening.
• These factors, combined with a resilient labour market, are likely to put upward pressure on inflation and have already started to reshape investor expectations.
• The models use currently observable market price trends to estimate what upcoming inflation reports will be.

Potential Consumer Inflation Impacts On Fed Policy

Fed officials have kept the rate at a 23-year high since last July in an effort to discourage borrowing and spending and push down inflation from the four-decade high it hit in 2022. The release of the CPI figures could boost the US Dollar’s (USD) upward momentum, though it’s unlikely to prompt any immediate changes in the Federal Reserve’s (Fed) monetary policy plans, at least in the very near term. Once upon a time – before his days as a financial reporter and assistant financial editor at legendary fashion trade paper Women’s Wear Daily – Dan worked for Spy magazine, scribbled away at Time Inc. and contributed to Maxim https://www.forex-world.net/ magazine back when lad mags were a thing.

Some economists, though, believe tariffs amount to a one-time rise in prices and inflation should return to its cooling trend by next year. Many forecasters expect U.S. companies to pass along most of the cost of Trump’s tariffs to consumers, giving the Fed more reason to keep rates higher for longer. Among consumer goods, used car prices rose 2.2%, more than expected, but apparel costs fell 1.4% and appliances, 0.6%. That’s a significant development because housing costs have fueled inflation more than any other category, making up 35% of overall price increases in January. Federal Reserve officials will be closely looking at the inflation data, and at least one central banker said this weekend she still isn’t confident that inflation is moving lower.

• With the score being one down, one to go on confirming that the early-year jump in prices either was a fluke or the last gasp of inflation, a positive CPI reading could mean the Federal Reserve is able to turn its gaze to other economic challenges, such as the slowing labor market.
• The gauge increased 0.3% in November, or the same rate seen over the previous three months.
• The unemployment rate has now risen to 4.3%, a 0.8 percentage point increase over the past year that has triggered a time-tested recession flag known as the Sahm Rule.
• « This is almost starting to look like a re-run of the first half of 2024, when inflation surprised everyone (including the Fed) on the upside. »
• For the closely-watched “core” CPI inflation, which strips out volatile food and energy costs, economists expect an annual rate of 3.2%, just a tick down from 3.3% in June.
• Markets now anticipate that the Federal Reserve will cut interest rates by just 25 basis points this year, keeping the outlook for the US Dollar stable for now.

Per the BLS, prices for the goods and services used to calculate the CPI are collected in 75 urban areas throughout the country and from about 23,000 retail and service establishments. The weight for an item is derived from reported expenditures on that item as estimated by the Consumer Expenditure Survey. For the record, the CPI report is released monthly by the Bureau of Labor Statistics, based on price data collected over the course of the month. January services inflation has been the highest of the year in each of the last three years—before sharply decelerating in the second half of both 2023 and 2024, writes Eric Winograd, director of developed market economic research at AllianceBernstein.