US January CPI Preview: Market Expectations for Year-over-Year Increase Drop to Last May's Low, Predicting Market Bets on "Moderate Cooling"

Bloomberg News has learned that as the U.S. Labor Department’s January Consumer Price Index (CPI) report is set to be released at 21:30 Beijing time on Friday, Wall Street is holding its breath for this key data point that could influence the Federal Reserve’s interest rate path for the year.

According to a consensus survey by Dow Jones, economists expect the overall CPI year-over-year increase for January to slow to 2.5%, down from 2.7% in December; if the data meets expectations, this closely watched inflation indicator will fall back to its lowest level since May 2025—that is, the month after the Trump administration implemented the “Liberalization Day” tariff policy (at the time, many economists warned that this policy would accelerate price increases).

On a month-over-month basis, both the overall CPI and core CPI (excluding food and energy) are expected to rise by 0.3%, matching last month’s increase. Notably, CPI has been below Wall Street expectations for three consecutive months. If January’s reading continues this moderate trend, it will give Federal Reserve policymakers more confidence to lower the benchmark borrowing rate while avoiding a resurgence of inflation.

Market forecasts: Nearly 50% chance of only a 0.2% month-over-month increase

Although the consensus expects a 0.3% month-over-month increase, the prediction market platform Kalshi shows a more cautious betting trend. Traders currently believe there is about a 45% to 47% chance that January’s CPI will increase by only 0.2% month-over-month.

Based on probability distribution, the market is nearly certain that CPI will record positive growth—data shows a 94% probability that the month-over-month increase will be positive, and a 78% chance it will exceed 0.1%. However, the probability of a 0.3% increase is only 14%, and the chance of a 0.4% or higher rise is less than 5%. This expectation distribution reflects the market’s fine-tuning between “steady inflation” and “slight cooling.”

Tom Lee, head of research at Fundstrat Global Advisors, noted in a recent report that the 2.5% overall CPI level has returned to pre-pandemic normal levels, roughly aligning with the average from 2017 to 2019. “Even if tariff impacts still linger in the data, this remains a ‘normal’ inflation environment.” Lee also emphasized that the current federal funds rate target range of 3.5%-3.75% is well above pre-pandemic levels, indicating the Fed has ample room to cut rates.

Goldman Sachs estimates that tariffs contributed about 0.07 percentage points to the January core CPI, with pressure mainly coming from clothing, leisure, housing, education, and personal care categories. However, the bank also believes that the overall CPI may be slightly below consensus, with a forecast of only 2.4%. If so, this would further reinforce expectations of easing inflation.

The non-farm payroll report released this Wednesday showed 130,000 new jobs added in January, with the unemployment rate falling to 4.3%, sparking concerns that a hot labor market could hinder the Fed’s rate cuts. However, analysts point out that as long as inflation data does not surprise to the upside, the resilience of employment is unlikely to reverse the policy shift.

Lee believes that “dovish Fed support for the stock market is consistent with our ‘three-stage market’ baseline scenario, and U.S. stocks are expected to end the year strongly.”