A point to note about the US CPI report later

February 12, 2025 at 09:37AM
This is something Adam mentioned already yesterday here: Warning: There is a January-effect in Wednesday’s CPI report

In essence, the seasonal effect is that there tends to be a bigger share of price increases in the first few months of the year, as compared to later in the year. But since the Covid pandemic, this effect has been less evident (due to accelerating price pressures causing firms to pass on costs to consumers at a much quicker pace perhaps) but it could still very much be a factor as there has been some normalisation since 2021:

So, this will add a bit of uncertainty in deciphering the readings today. But at the balance, no matter what the numbers say it won’t change the thinking at the Fed. That at least not when there’s still so much uncertainty regarding Trump’s policies in the months ahead.

Fed chair Powell did reaffirm that they would like to pause for longer on rates. That indicates a higher tolerance to stay flexible in my view. In other words, the Fed is not likely to pivot so quickly to cut rates just because we do get softer US data.

At the same time, I would still argue that it’s going to take a lot to convince of any pivot to rate hikes. We’re not quite at the stage to be even discussing that in my view. So, that should remove the relative upside bias from a stronger set of inflation numbers today.

And as mentioned, there’s still that seasonality factor to consider. Here are some bank views on that:

“There is some risk that inflation will once again firm to start the year due to residual seasonality, but
we think that many of the factors that boosted inflation readings during the first quarter of each of the past
two years reflected either idiosyncratic factors or pressures that have since abated to some degree.” – JP Morgan (forecast of +3.1% core CPI y/y)

“We found an overall upward bias of 5bp to January core CPI, explained by acceleration
in both core goods and services. We are adding that bias in our forecast.” – Morgan Stanley (forecast of +3.2% core CPI y/y)

“In the myth of residual seasonality, we argue that revisions to 2024 estimates will be minor, with
little evidence that the strong January inflation prints in recent years can be attributed to residual
seasonality.” – Barclays (forecast of +3.1% core CPI y/y)

“We expect some lingering residual seasonality to buoy January’s core reading, but for this
dynamic to be less pronounced than last year.” – Wells Fargo (forecast of +3.2% core CPI y/y)

This article was written by Justin Low at www.forexlive.com.