Consumer inflation for January is expected to rise by 7.2%, the highest level since 1982

Economists are anticipating another hot inflation report, with the headline CPI running at a pace of 7.2% in January.

The CPI was reported Thursday at 8:30 AM ET and is expected to show a 0.4% increase, a slower monthly increase than December, which posted a revised 0.6% headline gain. 

The annual forecast of 7.2% is the highest since 1982 and is up from 7% in December.

Core inflation, excluding food and energy, is expected to rise 0.4% in January or 5.9% year on year, according to Dow Jones. 

That compares to a monthly increase of 0.6% in December and an annual pace of 5.5% in the last month of last year.

CPI, percentage change from last year

The CPI is key to the markets as inflation is seen as a direct catalyst for higher interest rates by the Federal Reserve, and economists base their forecasts for the central bank on how much they believe inflation will slow from its fast pace. 

The Fed has made it clear that it will fight inflation, and is widely expected to raise interest rates several times this year, starting with a quarter-point increase in March.

Higher interest rate hike expectations

Market expectations of a Fed rate hike were moving higher, particularly after the strong January employment report, which showed that 467,000 jobs were added in January and 709,000 jobs were revised in November and December.

“The market took the employment data as something obvious to pricing in further Fed tightening this year. Market prices are in five or 5.5 hikes,” said Tom Simmons, an economist at Jefferies. 

“I think if that number came in higher than expected and pushed the number year-over-year to above 7.2% which further argues that the Fed will be aggressive in short order."

But Simons said he expects an increase of less than 0.3% in the core CPI “The scenario we imagine is when the number comes in somewhat less than expected, you wonder how the Fed takes that,” he said.

 "If inflation is really rolling in, how much is that causing them to tighten this year?"

"At the end of the day, I don't think this number is so critical that it could change anyone's outlook, but I think the surprising reaction would be in that context," Simons added.

Economists expect the hot annual inflation pace to peak by March, when the underlying effects of weak comparisons will wear off.

The pandemic has made the inflation trajectory unique in many ways, especially since price gains were under threat prior to 2020. 

As a result, economists and the Federal Reserve are watching to see how inflation ebbs and how long it lasts in the economy.

Michael Gaben, chief US economist at Barclays, said: “I think the message will be that it's still another month of strong CPI, but hopefully it will be a little lower than it was in December and a little bit lower than it was in December and lower than the recent peaks seen. in October". 

"We will be looking in particular for the prices of used goods and cars."Economists said the January CPI could show early signs of a trend toward slowing commodity inflation and a faster rise in prices for services, including shelter. 

This is expected to become more evident at the start of 2022.

“There is already wage-pushing inflation here in the service sector, and it will accelerate even as supply chain issues subside and things the Fed thinks are temporary,” said Diane Sonk, chief economist at Grant Thornton.

The perception, she said, is that service inflation will not rise significantly. "But it's hot enough to burn," Sonk added. "Things like rents matter to people, and medical bills will go up."

Gaben said some of the pandemic price shocks should start to fade. For example, he expects used-car price gains to be another 2.5% in January, but after that it should start tapering off. 

That compares with a hot pace of 3.5% in December. Used car prices, as of December, are up 37% year over year He noted that the used-car price jump in December was 1.3 percentage points from the 7% average for the consumer price index.

Supply chain issues should be mitigated with the passing of the year, which directly affects the cost of goods. However, Gaben said services inflation, fueled by demand and wage gains, should remain elevated at a 4% pace this year, above the 3% level in the pre-pandemic period.

Wages are deteriorating,” said Aditya Bhavi, chief US and global economist at Bank of America. 

Wages in December rose 0.7%, or 5.7% annually, according to the Bureau of Labor Statistics.

Wage inflation must continue. It is very difficult to find workers, and this is not going to end. Labor force participation is still very low. This is a difficult problem to solve."

Bhav said wages and shelter should continue to be a factor in rising CPI. Shelter costs are about 40% of the core CPI, and economists predict that they will continue to rise.

Consumer inflation for January is expected to rise by 7.2%, the highest level since 1982

Economists are anticipating another hot inflation report, with the headline CPI running at a pace of 7.2% in January.

The CPI was reported Thursday at 8:30 AM ET and is expected to show a 0.4% increase, a slower monthly increase than December, which posted a revised 0.6% headline gain. 

The annual forecast of 7.2% is the highest since 1982 and is up from 7% in December.

Core inflation, excluding food and energy, is expected to rise 0.4% in January or 5.9% year on year, according to Dow Jones. 

That compares to a monthly increase of 0.6% in December and an annual pace of 5.5% in the last month of last year CPI, percentage change from last year

The CPI is key to the markets as inflation is seen as a direct catalyst for higher interest rates by the Federal Reserve, and economists base their forecasts for the central bank on how much they believe inflation will slow from its fast pace. 

The Fed has made it clear that it will fight inflation, and is widely expected to raise interest rates several times this year, starting with a quarter-point increase in March.

Higher interest rate hike expectations

Market expectations of a Fed rate hike were moving higher, particularly after the strong January employment report, which showed that 467,000 jobs were added in January and 709,000 jobs were revised in November and December.

“The market took the employment data as something obvious to pricing in further Fed tightening this year. 

Market prices are in five or 5.5 hikes,” said Tom Simmons, an economist at Jefferies. 

“I think if that number came in higher than expected and pushed the number year-over-year to above 7.2% which further argues that the Fed will be aggressive in short order."

But Simons said he expects an increase of less than 0.3% in the core CPI “The scenario we imagine is when the number comes in somewhat less than expected, you wonder how the Fed takes that,” he said.

 "If inflation is really rolling in, how much is that causing them to tighten this year?"

"At the end of the day, I don't think this number is so critical that it could change anyone's outlook, but I think the surprising reaction would be in that context," Simons added.

Economists expect the hot annual inflation pace to peak by March, when the underlying effects of weak comparisons will wear off.

The pandemic has made the inflation trajectory unique in many ways, especially since price gains were under threat prior to 2020. As a result, economists and the Federal Reserve are watching to see how inflation ebbs and how long it lasts in the economy.

Michael Gaben, chief US economist at Barclays, said: “I think the message will be that it's still another month of strong CPI, but hopefully it will be a little lower than it was in December and a little bit lower than it was in December and lower than the recent peaks seen. in October". 

"We will be looking in particular for the prices of used goods and cars."

Economists said the January CPI could show early signs of a trend toward slowing commodity inflation and a faster rise in prices for services, including shelter. 

This is expected to become more evident at the start of 2022.

“There is already wage-pushing inflation here in the service sector, and it will accelerate even as supply chain issues subside and things the Fed thinks are temporary,” said Diane Sonk, chief economist at Grant Thornton.

The perception, she said, is that service inflation will not rise significantly. 

"But it's hot enough to burn," Sonk added. "Things like rents matter to people, and medical bills will go up."

Gaben said some of the pandemic price shocks should start to fade. For example, he expects used-car price gains to be another 2.5% in January, but after that it should start tapering off. 

That compares with a hot pace of 3.5% in December. Used car prices, as of December, are up 37% year over year. 

He noted that the used-car price jump in December was 1.3 percentage points from the 7% average for the consumer price index.Supply chain issues should be mitigated with the passing of the year, which directly affects the cost of goods. However, Gaben said services inflation, fueled by demand and wage gains, should remain elevated at a 4% pace this year, above the 3% level in the pre-pandemic period.

Wages are deteriorating,” said Aditya Bhavi, chief US and global economist at Bank of America. 

Wages in December rose 0.7%, or 5.7% annually, according to the Bureau of Labor Statistics.

Wage inflation must continue It is very difficult to find workers, and this is not going to end. 

Labor force participation is still very low. This is a difficult problem to solve."

Bhav said wages and shelter should continue to be a factor in rising CPI Shelter costs are about 40% of the core CPI, and economists predict that they will continue to rise.

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