Home Mutual Funds What You Need to Know Ahead of Tuesday’s Closely Watched CPI Inflation Report

What You Need to Know Ahead of Tuesday’s Closely Watched CPI Inflation Report

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Key Takeaways

  • The Consumer Price Index likely rose 2.9% over the year ending January, the slowest year-over-year inflation since March 2021, forecasters predict.
  • Policymakers at the Federal Reserve are watching inflation data closely to determine how soon, and how quickly, to cut the Fed’s key interest rate.
  • Cooling inflation could help household budgets on two fronts: easing price increases and, if the Fed cuts rates, reducing borrowing costs on all kinds of loans that currently have interest near multi-decade highs.

Forecasters are expecting Tuesday’s report on the Consumer Price Index (CPI) to deliver good news about inflation.

The CPI, a widely-watched gauge of inflation compiled by the Bureau of Labor Statistics, likely rose 2.9% over 12 months ending January, the lowest in nearly three years, according to a survey of economists by Dow Jones Newswires and the Wall Street Journal. Forecasters are anticipating January’s report to more than wipe out an unwelcome inflation uptick in December.

This and other inflation reports over the next few months could be key in determining how soon, and how quickly, the Federal Reserve will cut its benchmark interest rate. Recent reports have shown inflation running at or near the Fed’s goal of a 2% annual rate, but Fed chair Jerome Powell said he and other Fed policymakers want more “confidence” that inflation has been tamed before cutting rates.

If forecasts pan out, the consumer price index could help provide that confidence. Falling energy prices and a slowdown in food price increases could reduce the overall inflation rate, economists at RBC said in a commentary. 

However, stubbornly high rent increases could keep “core” CPI, which excludes food and energy prices, from falling too much. That’s important because policymakers look at core inflation measures as a more reliable indicator of future inflation trends.

Next week’s data is especially key for financial markets looking for respite from the Fed’s benchmark fed funds rate, which has sat at a 23-year high since July. The Fed’s rate hikes starting in March 2022 were intended to curb inflation but did so at the cost of pushing up interest rates to multi-decade highs on all kinds of loans.

A majority of traders are currently betting that the Fed will begin to cut interest rates at its meeting in May, according to the CME Group’s FedWatch tool, which forecasts Fed rate hikes based on fed funds futures trading data. Fed watchers have been expecting rate cuts for months as inflation has cooled, only to be repeatedly disappointed.

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.

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