January CPI May Provide Further Evidence of Cooling Inflation, But Is It Enough to Shift the Fed’s Wait-and-See Stance?
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January CPI May Provide Further Evidence of Cooling Inflation, But Is It Enough to Shift the Fed’s Wait-and-See Stance?
Slowing inflation will provide the Federal Reserve with greater policy flexibility; however, against the backdrop of fiscal expansion and three interest rate cuts last year—which delivered additional stimulus to the economy—markets are more focused on whether this deceleration is sustainable.
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At 9:30 p.m. Beijing time on Friday, the U.S. Bureau of Labor Statistics (BLS) will release the January Consumer Price Index (CPI) report. A likely slowdown in services prices is expected to drive a modest cooling in inflation for the month. However, it remains premature to expect this data alone to shift the Federal Reserve’s policy thinking.
Economists’ consensus forecasts indicate that the January CPI—which measures the cost of goods and services across the entire U.S. economy—is expected to rise 2.5% year-on-year, down from 2.7% in December, while the month-on-month increase is projected to hold steady at 0.3%. Core CPI—excluding food and energy—is forecast to rise 2.5% year-on-year, also down from the prior reading of 2.6%, with the month-on-month rate edging up slightly from 0.2% to 0.3%.
If the data meet expectations, the overall U.S. CPI will fall to its lowest level since May 2025—the month following the Trump administration’s implementation of the “Liberation Day” tariff policy—indicating a sustained decline in inflation since its peak above 3% in September last year.
Notably, the CPI has now come in below Wall Street expectations for three consecutive months. Should January’s reading again prove mild, it would bolster Fed policymakers’ confidence that they can lower the benchmark interest rate without reigniting inflation.
Wall Street’s View: Is This Inflation Dip Just Temporary?
Veronica Clark, Citigroup economist, notes that the anticipated slowdown in housing costs—which are classified as services—is expected to weigh on overall services inflation. However, goods prices may remain relatively firm, reflecting “the pass-through of tariff-related costs amid New Year price hikes by businesses.”
Goldman Sachs expects tariffs to add 0.07 percentage points to core inflation, potentially exerting upward pressure on categories including apparel, entertainment, household goods, education, and personal care. Still, Goldman projects January’s overall CPI to rise just 2.4% year-on-year—slightly below market expectations—which could further reinforce expectations of easing inflation.
That said, Goldman economists caution that modest price increases by businesses at the start of the year may exert some upward pressure on Friday’s CPI print. While overall services inflation is expected to slow, travel-related components—including airfares and hotel rates—may be exceptions.
Some economists doubt the sustainability of the recent disinflation trend, with a few even anticipating that January’s data could surprise to the upside.
RBC economists forecast that core CPI will rise 0.4% month-on-month in January and hold steady at 2.6% year-on-year—both above market expectations of 0.3% and 2.5%, respectively.
“Since 2021, January has typically seen elevated inflation due to businesses’ New Year price hikes and lagged seasonal factors,” wrote Mike Reid, RBC’s Head of U.S. Economics. He also anticipates early signs that wholesalers are beginning to pass tariff-related costs on to consumers.
Earlier, both the Institute for Supply Management (ISM) manufacturing and services PMIs signaled persistent pricing pressures, while Adobe’s Digital Price Index showed a sharp monthly rise in online goods prices.
Omair Sharif, founder of Inflation Insights, cautioned that the BLS’s recent re-adjustment of seasonal factors makes January’s data harder to interpret than usual—and investors should not dismiss any potential surprises. He noted that surges in core inflation in January 2024 and January 2025 were initially blamed on “residual seasonality,” but the true driver was extraordinary price hikes.
Some forecasters believe the January inflation dip may be the final piece of good news for some time. Thereafter, the Trump administration’s “Big and Beautiful” tax-cut legislation will gradually take effect, alongside the additional stimulus from the Fed’s three rate cuts last year—injecting more money into the economy.
Wells Fargo Securities economists commented: “Although both headline and core CPI are expected to dip modestly year-on-year in January, we do not anticipate further substantial disinflation throughout 2026, as accommodative fiscal and monetary policies will continue supporting demand.”
What Does This Mean for the Fed’s Policy Outlook?
Fed policymakers will closely scrutinize the upcoming inflation data. Internal debates among officials have undoubtedly become public. Although President Trump continues to pressure the Fed for aggressive rate cuts, policymakers remain divided: Should they resume easing—as they did late last year—to support the labor market, or hold rates higher for longer to push inflation back down to the 2% target?
The CME Group’s FedWatch tool shows markets expect the Fed to maintain a “wait-and-see” stance at least until July—a view unlikely to shift significantly based solely on the CPI print.
Stephen Juneau, U.S. Economist at Bank of America Securities, points out that even favorable data may have limited immediate impact on the Fed. The next meeting of the Federal Open Market Committee (FOMC) is scheduled for March 17–18.
“Although inflation has remained above the Fed’s 2% target for nearly five years, labor market data have overtaken inflation as the primary policy focus,” Juneau wrote. “Unless there is clear evidence of demand-driven inflation re-accelerating—or inflation expectations spiraling upward—the Fed will prioritize labor market dynamics.” Wednesday’s strong employment report—showing 130,000 new nonfarm jobs in January and unemployment falling to 4.3%—triggered a modest market pullback, as investors speculated that a resilient labor market could delay Fed rate cuts.
Tom Lee, Head of Research at Fundstrat Global Advisors, argues that an inflation rate of 2.5% aligns with pre-pandemic levels—matching the average observed between 2017 and 2019.
“Even as tariff impacts continue to appear in the data, this still qualifies as a ‘normal’ inflation environment,” Lee stated in his report. With the current federal funds rate target range at 3.5%–3.75%—well above pre-pandemic levels—“the Fed has ample room to cut rates.”
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