Will CPI Data Make the Fed More Cautious? Can Gold Bulls Hold On?
The market is closely watching tonight's CPI data to gauge whether the Federal Reserve's future rate cuts will dampen the enthusiasm of gold bulls.
At 21:30 Beijing time on Wednesday, February 12, the U.S. will release the January CPI inflation data. Market forecasts suggest that the report may indicate inflation remains slightly elevated, partly due to rising prices of core goods such as new and used cars.
Driven by Trump's tariff threats, gold has hit record highs eight times this year, bringing the $3,000 milestone into view. The market will closely monitor this inflation data to assess whether the Fed's future rate cuts will impact gold's bullish momentum.
Although inflation has significantly declined from its 2022 peak, it has yet to return to the Fed's target level. Adding complexity to the inflation outlook is the uncertainty surrounding the Trump administration's new policies, such as tariffs, which could exacerbate inflationary pressures in the coming months. Meanwhile, analysts note that a strong labor market gives Fed officials confidence to keep rates steady while awaiting more inflation data and clearer policy signals from Washington.
Economists' Predictions
According to FactSet's consensus estimates, January's overall CPI is expected to rise 0.3% month-on-month, keeping the annual rate at 2.9%. Core inflation (excluding volatile food and energy prices) is projected to increase 0.3% month-on-month and 3.1% year-on-year.
The New York Fed's latest Consumer Expectations Survey shows that short-term inflation expectations remained stable in January, but respondents' expectations for future spending plans have become more conservative. The New York Fed reported that one-year and three-year inflation expectations held steady at 3%, while five-year inflation expectations rose to 3% from 2.7% in December. Respondents also anticipated greater price pressures on food, gasoline, rent, college tuition, and medical costs, with home price expectations rising from 3.1% to 3.2%.
These relatively moderate inflation expectations contrast with the University of Michigan's Consumer Sentiment Survey released last Friday, which showed one-year inflation expectations surging to 4.3% in February from 3.3% in January, alongside a sharp decline in overall consumer confidence. Notably, the New York Fed's data collection spanned the entire month of January, while the University of Michigan's survey extended into early February.
On Monday, the Cleveland Fed noted in a separate report that large business executives generally expect inflationary pressures to ease over the next year, with CPI growth projected to decline from 3.8% in Q4 2024 to 3.2% in Q1 2025. Fed officials widely regard inflation expectations as a critical factor influencing actual price levels and view stable expectations as key to achieving the 2% inflation target.
Trump's Tariff Policies Fuel Inflation Caution
Josh Hirt, Senior Economist at Vanguard, expressed caution about the inflation outlook. He noted that the "base effect" from higher early 2024 figures could make current data appear milder, potentially leading to lower monthly inflation readings in the first few months of this year. Meanwhile, monthly inflation seems to be returning to levels closer to the Fed's target. "This is a very positive signal," he said. Additionally, pressures from rising housing and rental costs are beginning to ease.
However, Hirt pointed out that new tariff policies and still-rapid wage growth could hinder further disinflation. These factors may keep inflation elevated in the coming months. Hirt expects January's core inflation to rise 0.27% month-on-month, factoring in the annual seasonal adjustments announced this month. He predicts overall inflation will remain flat compared to December, as energy price pressures have eased.
Overall, analysts expect rising prices for new and used cars to drive January's core inflation higher. Meanwhile, service sector prices, including housing, remain under upward pressure, while food and energy prices are also expected to rise.
"Food inflation has rebounded since last summer and may persist, as food-related commodity prices have generally risen in recent months, particularly egg prices," Wells Fargo economists wrote last week. They noted that energy service prices could see significant increases this month due to surging natural gas prices, while energy commodity prices, including gasoline, are expected to rise more modestly.
Fed Rate Cuts Likely to Slow Further
With inflation remaining sticky, market participants are gradually scaling back expectations for a Fed rate cut in March. After cutting rates by a cumulative 1 percentage point in 2024, the Fed left the federal funds rate target range unchanged at 4.25%-4.50% in January.
Last week's strong nonfarm payrolls report further solidified the case for the Fed to hold rates steady in March. "This will give the Fed patience to wait," Hirt said. With a strong labor market indicating that high rates have yet to significantly harm the economy, the Fed can pause until inflation moves closer to its target.
According to the CME FedWatch Tool, the probability of a 25-basis-point rate cut in March is now just 8.5%, down from 14% a week ago and 24% a month ago. Investors expect a roughly 43% chance of a rate cut at the June meeting.
Some strategists even believe the Fed may not cut rates at all this year. Bank of America economists stated in a client note this week:
"The January jobs report highlights the resilience of the U.S. labor market, and we continue to believe the Fed's rate-cutting cycle is over. Inflation remains above target with upside risks, economic activity is strong, and the labor market appears to have stabilized at full employment.
