Prices are displayed in a food market on February 01, 2023 in Latest York City.
Leonardo Munoz | Corbis News | Getty Images
Just as Federal Reserve officials have grown optimistic that inflation is cooling, news could come countering that narrative.
All market eyes Tuesday shall be on the discharge of the Labor Department’s consumer price index, a widely followed inflation gauge that measures the prices for dozens of products and services spanning the economy.
The CPI was trending lower as 2022 got here to shut. Nevertheless it looks like 2023 will show that inflation was strong — even perhaps stronger than Wall Street expectations.
“We have gotten surprises on the soft side for the last three months. It would not be in any respect surprising if we get surprise on the recent side in January,” said Mark Zandi, chief economist at Moody’s Analytics.
Economists expect that CPI will show a 0.4% increase in January, which might translate into 6.2% annual growth, in line with Dow Jones. Excluding food and energy, so-called core CPI is projected to rise 0.3% and 5.4%, respectively.
Nevertheless, there’s some indication the number could possibly be even higher.
The Cleveland Fed’s “Nowcast” tracker of CPI components is pointing toward inflation growth of 0.65% on a monthly basis and 6.5% 12 months over 12 months. On the core, the outlook is for 0.46% and 5.6%.
The Fed model relies on what its authors say are fewer variables than the CPI report while utilizing more real-time data quite than the backward-looking numbers often present in government reports. Over time, the Cleveland Fed says its methodology outperforms other high-profile forecasters.
Impact on rates of interest
If the reading is hotter than expected, there are potential essential investing implications.
Fed policymakers are watching the CPI and a bunch of other data points for clues on whether a series of eight rate of interest increases is having the specified effect of cooling inflation that hit a 41-year high last summer. If it seems that monetary tightening is not working, it could force the Fed right into a more aggressive posture.
Zandi said, nonetheless, that it’s dangerous to make an excessive amount of of individual reports.
“We shouldn’t get fixated an excessive amount of on any month-to-month movements,” he said. “Generally, searching through month-to-month volatility we should always see continued decline in year-over-year growth.”
Indeed, the CPI peaked out around 9% in June 2022 on an annual basis but has been on the decline since, falling to six.4% in December.
But food prices have been stubborn, still up greater than 10% from a 12 months ago in December. Gasoline prices even have reversed course, with prices on the pump up about 30 cents a gallon in January, in line with AAA.
Even the initially reported 0.1% decline within the headline CPI for December has been revised up, and is now showing a gain of 0.1%, in line with revisions released Friday.
“If you’ve had a string of lower-than-expected numbers, can that proceed? I do not know,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.
Boockvar said he doesn’t expect the January report back to have numerous influence on the Fed by hook or by crook.
“Let’s just say the headline number is 6%. Is that actually going to maneuver the needle for the Fed?” he said. “The Fed seems intent on raising one other 50 basis points, and there is clearly going to be so much more evidence needed for them to vary that. One number is actually not going to do this.”
Markets currently expect the Fed to boost its benchmark rate of interest two more times from its current goal range of 4.5%-4.75%. That may translate to a different half a percentage point, or 50 basis points. Market pricing also indicates that Fed will stop at a “terminal rate” of 5.18%.
Changes within the CPI report
There are other issues that would forged a cloud over the report, because the Bureau of Labor Statistics is changing the way in which it’s compiling the report.
One significant alteration is that it’s now weighting prices on a one-year comparison quite than the two-year duration it had previously used.
That has resulted in a change in how much influence the assorted components could have — the weighting for each food and energy prices, as an example, could have an incrementally smaller influence on the headline CPI number, while housing could have a rather heavier weighting.
As well as, shelter could have a heavier influence, going from a few 33% weight to 34.4%. The BLS also will give heavier price weighting to unattached rental properties, versus apartments.
The change in weightings are done to reflect consumer spending patterns so the CPI provides a more accurate cost-of-living picture.
