Inflation report due Tuesday has the potential to deliver some bad news


Prices are displayed in a grocery store on February 01, 2023 in New 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 will be on the release of the Labor Department’s consumer price index, a widely followed inflation gauge that measures the costs for dozens of goods and services spanning the economy.

The CPI was trending lower as 2022 came to close. But it looks like 2023 will show that inflation was strong — perhaps even stronger than Wall Street expectations.

“We’ve gotten surprises on the soft side for the last three months. It wouldn’t be at all surprising if we get surprise on the hot side in January,” said Mark Zandi, chief economist at Moody’s Analytics.

Economists are expecting that CPI will show a 0.4% increase in January, which would translate into 6.2% annual growth, according to Dow Jones. Excluding food and energy, so-called core CPI is projected to rise 0.3% and 5.5%, respectively.

However, there’s some indication the number could 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% year over year. On the core, the outlook is for 0.46% and 5.6%.

The Fed model is based on what its authors say are fewer variables than the CPI report while utilizing more real-time data rather than the backward-looking numbers often found in government reports. Over time, the Cleveland Fed says its methodology outperforms other high-profile forecasters.

Impact on interest rates

Sylvia Jablonski: Good CPI could make investors tune out Fed and spark a rally

“When you’ve had a string of lower-than-expected numbers, can that continue? I don’t know,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

Boockvar said he doesn’t expect the January report to have a lot of influence on the Fed one way or the other.

“Let’s just say the headline number is 6%. Is that really going to move the needle for the Fed?” he said. “The Fed seems intent on raising another 50 basis points, and there’s clearly going to be a lot more evidence needed for them to change that. One number is certainly not going to do that.”

Markets currently expect the Fed to raise its benchmark interest rate two more times from its current target range of 4.5%-4.75%. That would translate to another half a percentage point, or 50 basis points. Market pricing also indicates that Fed will stop at a “terminal rate” of 5.18%.

Changes in the CPI report

There are other issues that could cast a cloud over the report, as the Bureau of Labor Statistics is changing the way it’s compiling the report.

One significant alteration is that it is now weighting prices on a one-year comparison rather than the two-year duration it had previously used.

That has resulted in a change in how much influence the various components will have — the weighting for both food and energy prices, for instance, will have an incrementally smaller influence on the headline CPI number, while housing will have a slightly heavier weighting.

In addition, shelter will have a heavier influence, going from about a 33% weight to 34.4%. The BLS also will give heavier price weighting to unattached rental properties, as opposed to apartments.

The change in weightings are done to reflect consumer spending patterns so the CPI provides a more accurate cost-of-living picture.

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