US CPI Preview: How Rising Inflation Could Complicate the Fed’s Efforts

US CPI preview, as we approach the upcoming Consumer Price Index (CPI) report, attention is focused on potential inflationary pressures that could complicate the Federal Reserve's monetary policy.

US CPI Report Release

The US Consumer Price Index (CPI) report for December is set to be released at 8:30 AM ET (13:30 GMT) on Wednesday, January 15.

Expectations for the US CPI Report

Traders and economists are predicting a headline US CPI inflation of 2.7% year-over-year, while the core CPI, excluding food and energy, is expected to be 3.3% year-over-year.

Understanding the Economic Impact

While economic data is crucial for economists, its significance for traders lies in its influence on market movements, primarily through central bank policy. The Federal Reserve aims to maintain full employment, and recent non-farm payroll (NFP) reports suggest they are on track. However, inflation has remained stubbornly in the 3% range following a steep decline in 2022 and 2023.

With a strong labor market and inflation slightly above the Fed's target, traders are beginning to push back expectations for another interest rate cut until later in the year. Consequently, volatility surrounding this week’s inflation reading may be less pronounced than in previous instances, as the Fed is likely to wait for more inflation and job reports before making further adjustments to interest rates.

Potential Implications of Rising Price Pressures

Should inflation pressures increase, traders may start to question whether the Fed's cycle of interest rate cuts has already concluded. This could complicate the Fed’s path forward, especially as it has indicated that its easing cycle may not be finished yet.

Although the Fed primarily focuses on the Core Personal Consumption Expenditures (PCE) index for its policy decisions, the CPI report holds significant weight for traders due to its earlier release. Recent data indicates that the year-over-year measure of US CPI has resumed its decline from the 2022 peak, but economists anticipate it to rise to 2.7% this month.

Key Influencing Factors

The “Prices” component of the Purchasing Managers' Index (PMI) has seen an uptick over the past month, which may continue if President-Elect Trump emphasizes protectionism and tariffs upon taking office.

Another critical aspect to consider is the “base effects,” which refer to the influence that the reference period has on the overall CPI figure. Last December's 0.3% month-over-month reading will drop out of the annual calculation after this week’s report. If the current month-over-month reading is below 0.3%, it could lead to a decrease in the headline year-over-year CPI.

US Dollar Technical Analysis: GBP/USD

Currently, one of the noteworthy currency pairs is GBP/USD, which is testing 14-month lows below 1.2200. The trend for the pound is decidedly bearish; however, the Relative Strength Index (RSI) is nearing oversold levels not seen in nearly a year, suggesting a potential bounce if UK data is favorable or US data is disappointing. In such a scenario, the previous support zone of 1.2260-1.2300 could act as resistance. Conversely, a robust US inflation report might push GBP/USD down toward the support range of 1.2050-1.2070.

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.