Investors Brace for CPI Report as Inflation Concerns Persist
Despite expectations that January’s consumer price index (CPI) report would show either little change or slight improvement from December, a key financial market indicator continues to signal potential inflationary pressures.
The five-year breakeven inflation rate—a gauge of average expected inflation over the medium term—stood at 2.6% on Tuesday, maintaining levels above its 50- and 200-day moving averages since late October, according to FactSet data. This suggests that inflation may remain above the Federal Reserve’s 2% target for an extended period.
“There’s still some lingering sticker shock from the 2021-22 inflation spike,” said Mark Heppenstall, chief investment officer at Penn Mutual Asset Management. “People are still adjusting to how quickly inflation surged to 9% in 2022.”
Tim Magnusson, chief investment officer and founding partner at Garda Capital Partners, echoed similar concerns. “While I don’t expect inflation to return to 2021-23 levels, it’s not out of the question that it could stay well above the Fed’s 2% target for months, or even years,” he said, citing recent University of Michigan data on consumer expectations. “If that turns out to be the case, the Fed may be forced to hold rates steady for longer.”
Traders anticipate January’s annual headline CPI inflation rate to come in at 2.9%, meaning even a small upside surprise could push it to 3% or higher for the first time since June 2024—potentially rattling financial markets and drawing the Fed’s attention.
Wall Street Journal-polled economists expect January’s year-over-year headline and core inflation rates to land at 2.8% and 3.1%, respectively, slightly down from December’s 2.9% and 3.2%. The monthly core reading is projected to remain at 0.3%.
Federal Reserve Chair Jerome Powell, speaking before Congress on Tuesday, indicated no urgency to adjust interest rates, stating that the impact of President Donald Trump’s tariff proposals remains uncertain.
Treasury yields climbed to their highest levels in over a week, with the 10-year yield reaching 4.54% after four consecutive sessions of gains. Meanwhile, stock markets closed mixed, with the Dow Jones Industrial Average rising 0.28%, the S&P 500 up 0.03%, and the Nasdaq Composite slipping 0.36%.
Heppenstall suggested that the 10-year yield may stabilize around 4.5%, advising investors to be cautious about overreacting to Wednesday’s CPI data. “There’s going to be ongoing back-and-forth on policy from the administration, with some days looking favorable and others negative,” he said. “I don’t expect yields to drop significantly, but a risk-off environment will also cap how high they can go.”
