US CPI Preview: Will Trade War Fears Push Headline Inflation Back Above 3%?

US CPI KEY TAKEAWAYS:

• US CPI expectations: 2.9% y/y headline inflation, 3.1% y/y core inflation
• The Fed is likely to remain on hold for the next several months regardless of this month’s CPI reading, with a hotter-than-expected print potentially prompting traders to price out any rate cuts in 2025.
• The US Dollar Index (DXY) is rallying off range support, opening the door for extended gains toward 109.00 if the CPI reading comes in hotter-than-expected.

When is the US CPI report?

The US CPI report for January will be released at 8:30ET (13:30 GMT) on Wednesday, February 12.

What are the US CPI Report Expectations?

Traders and economists are projecting headline CPI to come in at 2.9% y/y, with the core (ex-food and -energy) reading expected at 3.1% y/y.

US CPI Forecast

Economic data is interesting for economists, but for traders, it’s only interesting insofar as it impacts markets. For that, we have to consider the “transmission mechanism” between the data and market movements: central bank policy.

The Fed, as always, is focused on both maintaining full employment (based on Friday’s NFP report, the labor market remains steady, if not quite as strong as a couple years ago) and inflation, which has stubbornly stalled in the 3% range after a steep decline in 2022 and 2023.

With the labor market remaining strong and inflation still (slightly) above the Fed’s target, it’s not surprising that traders are pushing out prospects of another interest rate cut from the Fed toward the middle of the year; accordingly, the volatility around this week’s inflation reading may be more limited than in the past, as the Fed will, in all likelihood, still get another handful of inflation (and jobs) reports before making any additional changes to interest rates.

That said, a pickup in price pressures could lead traders to start asking whether the Fed’s interest rate cutting cycle may be completed already, complicating the path forward for a central bank that has clearly been hinting that the easing cycle isn’t done yet.

As many readers know, the Fed technically focuses on a different measure of inflation, Core PCE, when setting its policy, but for traders, the CPI report is at least as significant because it’s released weeks earlier. As the chart below shows, the year-over-year measure of US CPI has now risen for three straight months after ticking just below 2.5% back in September:

Source: TradingView, StoneX

As the chart above shows, the “Prices” component of the PMI reports has risen in recent months and may continue to rise if President-Elect Trump continues to emphasize protectionism and tariffs when he takes office, potentially putting upward pressure on the CPI report itself.

Crucially, the other key component to watch when it comes to US CPI is the so-called “base effects,” or the influence that the reference period (in this case, 12 months) has on the overall figure. Last January’s 0.3% m/m reading will drop out of the annual calculation after this week’s print, opening the door for an decrease in the headline year-over-year CPI reading if the month-over-month reading is less than 0.3%.

US Dollar Index Technical Analysis – DXY Daily Chart

Trend line breaks are one of the trickiest setups in technical analysis. By definition, a trend breaking means that it is fundamentally changing, but as any experienced trader will tell you, a broken uptrend doesn’t automatically transition immediately into a downtrend; sometimes, a broken uptrend merely leads into a sideways range or even a shallower uptrend.

When it comes to the US Dollar Index, the former situation appears to be at hand. Since breaking below Q4’s bullish trend line in mid-January, the US Dollar Index has carved out a clear range between support at 107.50 and resistance around 1.0975. As of writing, the pair is bouncing off support, perhaps boosted by Friday’s solid NFP report and the potential for additional tariff announcements, so a hotter-than-expected CPI reading could push DXY back toward 109.00, whereas a cool reading could take the index back toward well-established support near 107.50.

-- Written by Matt Weller, Global Head of Research

Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on Twitter: @MWellerFX