- January inflation has a history of running hotter, a pattern the Boston Fed says markets and policymakers are closely monitoring.
- The Boston Fed noted that residual seasonality and more frequent price resets in January can distort inflation data, potentially pushing readings higher.
- Sectors that typically reprice at the start of the year tend to show elevated inflation, amplifying the January effect, it added.
U.S. consumer prices could spring a surprise, and the headline Consumer Price Index (CPI) for January could come in hotter than expected, warned market experts ahead of the release of the inflation report later on Friday.
Wall Street analysts expect both the headline and the core CPI to rise 0.3% in January, according to MarketWatch data. On an annual basis, both core and headline growth are forecast at 2.5%.
“There's a chance CPI could be hotter than expected, a trend in recent Januarys. This could be a seasonal effect that statisticians need to iron out, but investors should be aware of the possibility,” stated analysts at Schwab Center for Financial Research (SCFR), in their latest note.
Devil In The Details
The firm noted that the possibility of a surprisingly strong inflation might be discounted to some extent. Cooper Howard, director of fixed income research and strategy at SCFR, noted that there are two extreme narratives in the market currently – one that inflation is too hot, and the other that it is too cold.
“While the headline is important, the devil will be in the details,” Howard said.
The CPI report comes amid a broader market sell-off, with the Dow Jones Industrial Average closing nearly 670 points lower on Thursday. The S&P 500 index closed 1.6% lower, while the Nasdaq Composite declined more than 2%.
Mohamed El-Erian, Chief Economic Advisor at Allianz, pointed out in a post on X that inflation will enter its sixth year of being persistently above the Federal Reserve’s long-term target of 2%.
“What is virtually guaranteed is that these first 2026 inflation numbers will be part of a bigger set of data confirming that the US is in its sixth consecutive year of inflation running above the Federal Reserve’s target. That’s the bad news,” he said.
The January Effect
The Federal Reserve Bank of Boston noted that inflation came in higher in January.
The Boston Fed highlighted three reasons that could be behind this trend. This includes residual seasonality, more often a price change in January, and higher inflation in sectors that see price changes at the start of the year.
“The behavior of January inflation is especially relevant now as markets and policymakers remain watchful for changes to underlying inflation,” the Boston Fed said in its latest note.
However, analysts at ING Think note that Friday’s U.S. CPI report is likely to have a smaller market impact than Wednesday’s payrolls.
“The Federal Reserve has been signalling little urgency to cut again, and it’s mostly the jobs market that can move the needle,” the firm said.
ING Think analysts don’t expect a surprise in the CPI report, which they say aligns with the recent hawkish reprisal in Fed expectations.
Meanwhile, U.S. equities declined in Friday’s pre-market trade. At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was down by 0.27%, the Invesco QQQ Trust ETF (QQQ) fell 0.33%, while the SPDR Dow Jones Industrial Average ETF Trust (DIA) declined 0.29%. Retail sentiment around the S&P 500 ETF on Stocktwits was in the ‘bearish’ territory.
The iShares 7-10 Year Treasury Bond ETF (IEF) was down by 0.09% at the time of writing.
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