Source: Jinshi Data

Nick Timiraos, a reporter from the Wall Street Journal known as the "Fed's mouthpiece," pointed out that not all monthly CPI inflation reports are equally important; in an economy facing price pressure, the CPI data for January has a greater impact.

In recent years, price increases in the USA during January have been exceptionally strong, reflecting significant adjustments in prices at the start of the year. Timiraos stated that the inflation report to be released this week may show whether the Federal Reserve's efforts to lower inflation have cleared a key hurdle.

The beginning of the year is the time when businesses incorporate higher costs for food, energy, and labor over the year, for instance, restaurants raise menu prices, gyms increase membership fees, and private Car Service raises transportation fees.

This price increase is particularly severe following the high inflation brought about by the economic restart after the COVID-19 pandemic in 2021.

Omair Sharif, founder of the research firm Inflation Insights, stated, "If you want to raise prices, the beginning of the year is a logical time."

Sharif mentioned that because businesses have greater pricing power when the economy is strong, companies have not been deterred so far, even though "consumers say they will not tolerate further price increases," and have significantly raised prices at the end of the year.

The Labor Department is scheduled to release January's CPI data on Wednesday, while another report on wholesale prices, the PPI report, will be released on Thursday. Some sub-items of these two Indicators will be used to calculate the inflation measure favored by the Federal Reserve—the PCE Price Index, which is usually released by the Department of Commerce at the end of the month.

Timiraos emphasized that this data is significantly important for the Federal Reserve. A year ago, inflation seemed to be rapidly advancing towards the Federal Reserve's target, but they faced major setbacks in the first quarter. Additionally, officials encountered similar inflation surprises in early 2023 when changes in seasonal adjustment factors offset the progress previously achieved by the Federal Reserve.

Dallas Federal Reserve President Logan stated in a speech last week, 'We don't know if 2025 will bring another shock like this, but if inflation rises, it will indicate that MMF still has more work to do.'

Logan stated that if the labor market remains healthy and price pressures continue to show a noticeable broad slowdown in recent months, the USA economy will achieve the elusive "possibility of a soft landing,". However, she also issued an important warning about the "false alarm" of inflation over the past two years. "We have experienced this kind of situation with inflation issues," she said.

According to the PCE Index, so-called core inflation has dropped from 5.6% in September 2022 to 2.9% in February 2024. It has remained around this level for most of the past year, projected to be 2.8% by the end of 2024.

Alan Detmeister, who was responsible for the Federal Reserve's price and wage forecasting department, stated, 'Assuming we are not significantly impacted by tariffs, immigration, or some other unexpected changes, the next three months are actually crucial for this year's inflation.' Detmeister, an economist at UBS Group, believes that the year-on-year growth rate of the core PCE index in March may drop to 2.3%. The Federal Reserve's target is 2%.

The Federal Reserve lowered interest rates by a full percentage point in the last three meetings of 2024. Officials stated they are not in a hurry to continue cutting rates until they are more confident inflation will reach the target.

Detmeister mentioned that about half of the price increases occur in the first quarter of each year before seasonal adjustments. 'Because most price changes happen then, your largest forecasting errors and biggest surprises will also occur at that time.'

Additionally, Timiraos also stated that another reason the inflation report tonight is particularly important is that Trump is implementing new tariffs, including an additional 25% tariff on steel and Aluminum imports, which further complicates the inflation outlook for 2025.

Although Trump's tariffs in 2018 and 2019 had a negligible impact on inflation indicators, the current range of tariffs is broader and will affect more Consumer goods that make up a larger share of the price basket. "What they are doing now is completely different from what they did then," Sharif said.

Detmeister said that even if the first quarter inflation data does not hit the Federal Reserve hard again, the increase in tariffs may give Federal Reserve officials reason to slow down the rate cuts. "This could make them more cautious in lowering interest rates."

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编辑/jayden