Inflation Rebound?

What Will Tomorrow's CPI Numbers Tell Us?

The rise and fall of consumer price inflation has been by far one of the most significant economic stories of 2022. The first CPI report for 2023 is almost sure to continue that trend.

While there is little doubt that consumer price inflation has retreated significantly from its summer 2022 peak, there is also no doubt that it remains well above the Fed’s desired range of 0-2% year on year.

Indeed, some Wall Street analysts anticipate the January CPI numbers will not be kind to the stock market.

The upcoming February 14 Consumer Price Index (CPI) report is poised to deliver a significant blow to the equity market. The market has been on a meteoric rise since the start of 2023, fueled by dreams of falling inflation and the possibility of interest rate cuts from the Federal Reserve. However, if the report reveals the expected change in trend from the previous couple of months of disinflation, it could shatter market hopes and cause a significant market reversal. The report could mark a turning point in the equity market's expectations for inflation and interest rates, with far-reaching implications.

One of the likely sticking points in the CPI report is going to be the potential for a rising month on month trend in consumer price inflation, even as the year on year figures continue to decline.

The year-over-year headline CPI is forecast to decline from 6.5% year-over-year in December, while core CPI drops from 5.7%. However, the headline CPI is anticipated to jump month over month from the recently revised increase of 0.1% in December, while core CPI is expected to be flat at 0.4%.

We do well to remember that, in December, the month on month change in both the core CPI and the core PCE Index significantly exceeded the headling CPI and PCE Index numbers.

Additionally, the core measures for both consumer price inflation metrics rose month on month.

Should January even be just a repeat of December’s CPI report, it still would leave inflation well above where the Fed has said they want to see inflation, and so the Fed will likely feel leave to keep raising the Federal Funds rate—and might even feel the impetus to make the next rate hike 50bps or more. Wall Street is still pricing in just a 25bps rate hike, but an inflation report that is hotter than already anticipated would quickly change that calculation.

Inflation was the hottest economic story of 2022, and it will likely remain so for 2023. That is the one safe prediction to be made on the eve of 2023’s first inflation data.