Tomorrow, January 10, before the market open, the Bureau of Labor Statistics will announce the Consumer Price Index inflation for January.
Right now economists surveyed by Bloomberg are expecting an annualized increase of 7.2% in inflation. That would be a significant increase from the 7% CPI inflation rate in December and the highest inflation reading since 1982.
The financial markets are expecting the Federal Reserve to raise its benchmark short term interest rate at its March 16 meeting by either 25 basis points or 50 basis points. A 50 basis point move would be the most aggressive in more than two decades.
Before a much stronger than expected January jobs report last week, the Fed Funds futures market was giving a 50 basis point increase just a 20% chance. Now the odds of a 50 basis point move have climbed to 33%.
A CPI inflation reading above the expected 7.2% would be likely to push odds of a 50 basis point increase even higher.
Economists are projecting that core inflation, that is inflation excluding volatile food and energy categories, rose 5.9% in January year over year.
While the top line numbers are important, the Fed will also be looking at the composition of inflation. The two largest components of shelter (itself a major driver of the index) rent of primary residence and owners’ equivalent rent ar projected to post another big increase in January. And the Fed could well discount any inflation help coming from airfares and lodging away from home on the grounds that price declines in those categories are just temporary artifacts of the Pandemic and that prices in those categories–and for other services–are likely to start moving up even more quickly with a drop in new infections from the Omicron Variant.
The financial markets (and the Fed) are also likely to torture the numbers looking for any clues about when inflation might peak. Economists at Bloomberg are projecting that inflation will peak in February.
