The inflation data anticipated on Tuesday may contain some unpleasant news.

Just as Federal Reserve officials have grown confident that inflation is slowing, news contradicting that picture could emerge.

All eyes on the market The Labor Department’s consumer price index, a widely followed inflation indicator that monitors the costs of dozens of goods and services across the economy, will be released on Tuesday.

As the year 2022 came to a conclusion, the CPI was on the decline. However, it appears that inflation will be high in 2023, maybe exceeding Wall Street projections.

“We’ve had soft side surprises over the last three months. “It wouldn’t be shocking if we got a hot surprise in January,” said Mark Zandi, chief economist at Moody’s Analytics.

According to Dow Jones, economists anticipate a 0.4% increase in CPI in January, translating into 6.2% annual growth. The core CPI, which excludes food and energy, is expected to climb by 0.3% and 5.5%, respectively.

However, there are some indications that the figure could be significantly higher.

The Cleveland Fed’s “Nowcast” tracker of CPI components predicts monthly inflation of 0.65% and annual inflation of 6.5%. The basic forecast is from 0.46% to 5.6%.

The Fed model is based on fewer factors than the CPI report, according to its creators, and uses more real-time data rather than the backward-looking numbers commonly found in official reports. The Cleveland Fed claims that its methodology beats other prominent forecasters over time.

Impact on interest rates
If the reading is higher than predicted, there could be significant investment ramifications.

The CPI and a slew of other data points are being scrutinized by Fed policymakers to see if a sequence of eight interest rate hikes is having the desired effect of reducing inflation, which reached a 41-year peak last summer. If monetary tightening fails to provide the desired results, the Fed may be forced to adopt a more aggressive stance.

However, Zandi cautioned against making too much of individual reports.

“We shouldn’t become too focused on month-to-month changes,” he remarked. “Looking at month-to-month volatility, we should see continuous year-over-year growth drop.”

Indeed, the CPI peaked at approximately 9% on an annual basis in June 2022 but has since fallen to 6.4% in December.

However, food prices have remained persistent, remaining more than 10% higher year on year in December. According to AAA, gasoline prices have also reversed direction, with prices at the pump rising by nearly 30 cents a gallon in January.

According to revisions issued Friday, the initially reported 0.1% fall in the headline CPI for December has been revised up to a 0.1% rise.

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“Can you keep having a streak of lower-than-expected numbers? “I’m not sure,” said Bleakley Advisory Group’s chief investment officer, Peter Boockvar.

Boockvar believes the January report will have little impact on the Fed in either direction.

“Let’s say the headline figure is 6%. Is it going to make a difference for the Fed?” he wondered. “The Fed looks bent on rising another 50 basis points, and there’s clearly going to be a lot more evidence needed for them to modify that. One number is not going to accomplish this.”

The Fed is expected to raise its benchmark interest rate two more times from its current target range of 4.5%-4.75%, according to market expectations. This equates to an additional half-point or 50 basis points. Market pricing also suggests that the Fed will pause at a “terminal rate” of 5.18%.

CPI Report Modifications
There are other difficulties that could muddy the report, as the Bureau of Labor Statistics is changing the method the report is compiled.

One noteworthy change is that it is now comparing pricing over a one-year period rather than the two-year period it previously used.

As a result, the weighting for food and energy costs, for example, will have an incrementally smaller influence on the headline CPI statistic, while housing will have a little greater weighting.

Furthermore, the shelter will have a greater influence, increasing from roughly 33% to 34.4%. The BLS will also give detached rental properties a higher price weight than apartments.

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The weightings are changed to suit consumer spending patterns, allowing the CPI to present a more realistic cost-of-living picture.

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