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In order to evaluate the Federal Reserve's success in combating inflation, investors are anxiously anticipating the release of the January Consumer Price Index (CPI) report, which is scheduled for 8:30 a.m. EST on Tuesday, February 12. The market has lowered its expectations for a March rate reduction. But because of unforeseen circumstances, the Fed is thinking about delaying the cut until May or June. Additionally, Tuesday's data will have a significant impact on how the market feels.
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What Can We Expect This Week From the Major Data Release?
Consumer Price Index (CPI)
FactSet projections indicate that the U.S. CPI will grow by 0.2% in January, continuing the trend from December. In addition, a 0.3% increase in Core CPI—which does not include volatile food and energy prices—is predicted for January, continuing the upward trend from December. However, the CPI is expected to increase by 2.9% in January compared to December's 3.4% increase year over year. In the meantime, it is projected that the core CPI would rise 3.7% YoY, down from 3.9% in December.
According to a Morning Star story, Northern Trust Wealth Management's Chief Investment Officer, Katie Nixon, believes that January's CPI growth will "continue to trend in the right direction." She did, however, note that it will happen more slowly than decreases in PCE inflation, the Fed's favored metric.
Increased uncertainty about monetary policy and inflation in the crypto market frequently prompts investors to look for alternative assets like Bitcoin (BTC) and other cryptocurrencies. Additionally, Bitcoin functions as an inflation hedge, which may increase its acceptance should inflation spike. Furthermore, there is a greater likelihood of a migration to the cryptocurrency market if the gain exceeds forecasts.
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Producer Price Index (PPI)
Given their correlation, the PPI may rise in tandem with the anticipated increases in the January CPI and Core CPI. Nevertheless, in December 2023, despite mounting concerns about inflation, the PPI decreased by 0.1%. Furthermore, the 1% increase from the previous year signifies a major accomplishment in the fight against inflation.
Therefore, if it continues to follow the same pattern, it may act as a significant deterrent to further reducing inflationary pressure. Eventually, the PPI decline may aid in reducing the spike in CPI. This might stop people from investing in riskier and more volatile assets like Bitcoin and other cryptocurrencies.
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Housing & Rent Expenses
Nixon also emphasized that although inflation is generally falling, some elements—like housing expenses and services—are slower to do so because of their sticky character. LPL Financial's Chief Economist, Jeffrey Roach, agreed, stressing that the intricacy of inflation dynamics is increased by the lag in some categories, such as rent and service pricing. All analysts, however, predict that rent inflation will decline in the upcoming months.
However, in recent months, the price of products has dropped quickly enough to reduce headline inflation. Nixon characterizes this trend as a "push/pull" dynamic, where inflation from the services side is compensated by advancements on the goods side.
The Function of Labor Markets in Inflationary Pressure
Moderation of inflation is challenged by the labor market's continued strength. Consumer spending is still being driven by strong employment statistics and real salary improvements, which could put pressure on prices to rise. According to Nixon, the solid jobs data from last week served as a warning that the "last mile" of inflation is still elusive.
Potential inflationary pressures from growing manufacturing prices and supply chain disruptions, notably in the Red Sea region, are risks to the inflation outlook for January. These difficulties might make it more difficult for the Fed to decide when to consider possible rate decreases.
Fed Rate Reduction Or Holding Off?
The CME FedWatch Tool indicates that there is a 52% possibility of a rate drop in May and a 39% chance of rates staying the same. Prior to contemplating rate reductions, Federal Reserve Chair Jerome Powell has underlined the need for additional proof of persistent inflation moderation. He also emphasized the significance of keeping a careful eye on economic indicators.
In addition, officials are thinking about delaying the rate drop until May or June because of a number of reasons, including the expected effect on the markets. The market's response to changing macroeconomic conditions may cause cryptocurrency prices to become more volatile as expectations for a prospective rate cut change.