CPI data is coming! The market expects inflation to remain above the Federal Reserve's 2% target

According to the Zhitong Finance APP, investors and traders are closely monitoring the Consumer Price Index (CPI) data for January, which is set to be released on Wednesday. The market generally expects this data to show a slight improvement or remain flat compared to December 2024. However, certain parts of the financial market are still signaling that prices may continue to rise in the future.

According to FactSet, the five-year breakeven inflation rate, which measures inflation expectations over the next five years, recorded 2.6% on Tuesday and has remained above its 50-day and 200-day moving averages since the end of October 2023. This trend suggests that inflation may remain above the Federal Reserve's 2% target in the coming years.

Tim Magnusson, Chief Investment Officer and founding partner of Garda Capital Partners, stated that he does not believe inflation will return to the extreme levels seen between 2021 and 2023, but the possibility of inflation remaining above the Federal Reserve's 2% target still exists, potentially for months or even years. He cited the latest consumer expectations data from the University of Michigan, indicating that current consumer concerns about inflation persist, which may lead the Federal Reserve to maintain a wait-and-see approach without rushing to adjust interest rate policies.

If the upcoming CPI data exceeds market expectations, even slightly, it could impact the financial markets and draw significant attention from Federal Reserve officials. Inflation traders are already anticipating a year-on-year CPI increase of around 2.9% for January, so any data above this level could push the inflation rate to 3% or higher, marking the first breakthrough since June 2024. The market currently expects the annual CPI inflation rate from June to November 2024 to remain at 2.9%, indicating that inflation may still remain sticky and difficult to decrease rapidly. Meanwhile, the uncertainty surrounding President Trump's policies has further heightened market concerns about inflation, as investors are unclear whether his tariff plans will actually be implemented and what impact these policies will have on price levels.

According to a survey of economists by foreign media, the year-on-year CPI for January is expected to be 2.8%, slightly lower than December's 2.9%, while the core CPI (excluding food and energy prices) is expected to be 3.1%, also a slight decrease from December's 3.2%. The monthly increase in core CPI is still expected to be 0.3%, indicating that inflation, despite a slowing trend, remains stubbornly present. Although these forecasts suggest a slight retreat in inflation, if the CPI data exceeds market expectations, investors may need to reassess the Federal Reserve's policy direction and adjust their outlook for the market.

Federal Reserve Chairman Jerome Powell stated during his testimony to Congress on Tuesday that there is no urgent reason for the Federal Reserve to adjust interest rates and noted that it is still unclear whether Trump's tariff plans will actually be implemented. This statement did not have a significant impact on market sentiment, as investors still expect the Federal Reserve to maintain current interest rates for a longer period until there is a clearer downward trend in inflationMarket analysts believe that the Federal Reserve will continue to pay attention to broader economic data, rather than just a single CPI report, when deciding when to cut interest rates. Powell's remarks suggest that even if inflation shows a slight decline, the Fed will not be in a hurry to change its current policy stance.

Before the CPI data was released, the U.S. Treasury market had already reacted, with the yield on the 10-year U.S. Treasury bond rising to 4.54% on Tuesday, reaching its highest level in at least a week and increasing for four consecutive trading days. This trend indicates that the market's expectations regarding inflation prospects and Fed policy remain cautious. Meanwhile, the U.S. stock market showed mixed performance, with the Dow Jones Industrial Average rising by 0.28%, the S&P 500 slightly up by 0.03%, while the Nasdaq Composite Index fell by 0.36%. Mark Heppenstall, Chief Investment Officer of Penn Mutual Asset Management, stated that the yield on the 10-year U.S. Treasury bond may stabilize around 4.5%, and the market may react in the short term to Wednesday's CPI data, but it will not lead to a change in long-term trends. He believes that investors should be wary of short-term fluctuations in the bond market and not overreact. He added that there is significant policy uncertainty in the current market, with some days potentially benefiting the market while others may bring negative impacts. He expects that U.S. Treasury yields will not decline significantly, and risk aversion will limit further upward movement.

Heppenstall also pointed out that although the inflation rate has fallen from its peak in 2022, the market and consumers still harbor doubts about the long-term effects of inflation. He believes that the current market is experiencing an "embedded inflation psychology," with many still shocked by the inflation rate soaring to 9% in 2022. The continuation of this inflation psychology may lead to a sustained upward trend in prices and further influence the market's inflation expectations