Investors will look to the release of the January Consumer Price Index (CPI) report, scheduled for 8:30 a.m. EST on Tuesday, February 12, to assess the Fed’s progress in combating inflation. I’m looking forward to it. Market participants have tempered expectations for a March interest rate cut. However, the Fed is considering postponing the rate cut from May to June due to unavoidable reasons. Moreover, Tuesday’s data will be crucial in shaping market sentiment.
What can you expect from this week’s major data releases?
Consumer Price Index (CPI)
U.S. CPI is expected to rise 0.2% in January, consistent with December’s rise, according to FactSet forecasts. Furthermore, core CPI, which excludes volatile food and energy prices, is expected to rise 0.3% in January, reflecting December’s rise. Meanwhile, year-on-year, CPI is expected to rise 2.9% in January, slightly lower than December’s 3.4%. Meanwhile, core CPI is expected to rise 3.7% year-on-year, down from 3.9% in December.
Katie Nixon, chief investment officer at Northern Trust Wealth Management, said she expects CPI growth to “continue in the right direction” in January, Morningstar reported. But he added that the pace of decline would be slower than the decline in PCE inflation, the Fed’s preferred measure.
In the crypto market, rising uncertainty around inflation and monetary policy often causes investors to seek alternative assets such as Bitcoin (BTC) and other cryptocurrencies. Additionally, Bitcoin acts as a hedge against inflation, so rising inflation could encourage Bitcoin adoption. Moreover, if the increase is higher than expected, there is a high possibility of migration to the crypto market.
Producer Price Index (PPI)
Since January CPI and Core CPI are expected to rise, PPI may also rise as they are correlated. However, despite rising inflation concerns, PPI fell by 0.1% in December 2023. Additionally, the year-on-year increase was 1%, marking a significant milestone in efforts to curb inflation.
Therefore, if it mirrors the same trend again, it could be a major catalyst to further minimize inflationary pressures. Lowering the PPI could ultimately help limit the rise in the CPI. This can limit migration to volatile and risky assets like Bitcoin and other cryptocurrencies.
Also read: The end of the American empire? Robert Kiyosaki sees Bitcoin as savior amid debt crisis
Housing costs and rent
President Nixon also emphasized that although inflation is generally declining, some factors, such as housing costs and services, are too persistent to keep pace. Jeffrey Roach, chief economist at LPL Financial, echoed this sentiment, stressing that lags in certain categories such as services and rent prices are contributing to the complexity of inflation trends. However, analysts across the board expect rent inflation to decline in the coming months.
On the other hand, prices have continued to decline rapidly in recent months, bringing down the headline inflation rate. Mr. Nixon described this trend as a “push-pull” dynamic, with advances in goods offsetting inflation in services.
The role of the labor market in inflationary pressures
The continued strength of the labor market poses challenges to controlling inflation. Rising real wages and solid employment data continue to boost consumer spending, potentially putting upward pressure on prices. Mr. Nixon said last week’s strong jobs report was a reminder that the “last mile” of inflation remains elusive.
Risks to the January inflation outlook include potential inflationary pressures from rising manufacturing costs and supply chain disruptions, particularly in the Red Sea region. These challenges could complicate the Fed’s decision-making process when figuring out when to cut interest rates.
Will the Fed cut or suspend interest rates?
According to the CME FedWatch Tool, expectations for a rate cut in May are 52%, while the chance that rates will remain unchanged is 39%. Federal Reserve Chairman Jerome Powell stressed that more evidence of sustained inflation relief is needed before considering rate cuts. He also emphasized the importance of closely monitoring economic data.
Officials are also considering delaying the Fed’s rate cut until the May-June quarter, citing a variety of factors and expected market impacts. Cryptocurrency price volatility may increase as traders react to changes in macroeconomic trends as expectations for a potential interest rate cut fluctuate.
Also read: Cryptocurrency emerges as a viable alternative amid US tax filing challenges
