US January CPI Outlook: Market expects year-on-year growth to fall to the low levels of last May, predicting the market is betting on a "mild cooldown."

As the US Department of Labor Statistics January Consumer Price Index (CPI) report is set to be released on Friday at 9:30 PM Beijing time, Wall Street is holding its breath for this key data that could impact the Federal Reserve's interest rate path for the year. A Dow Jones consensus survey shows that economists expect the overall CPI year-on-year growth rate for January to slow down to 2.5%, further down from December's 2.7%; if the data matches expectations, this closely watched key inflation indicator will drop to its lowest level since May 2025 - the month following the implementation of the Trump administration's "Liberation Day" tariff policy (at that time, many economists warned that this policy would accelerate prices). On a month-to-month basis, both overall CPI and core CPI (excluding food and energy) are expected to rise by 0.3%, in line with the previous month's increase. It is worth noting that CPI has been below Wall Street's expectations for three consecutive months, and if the January reading continues the mild trend, it will provide more confidence to Federal Reserve policymakers to lower benchmark interest rates while avoiding a resurgence of inflation. Market predictions: Nearly a 50% probability of only a 0.2% increase month-on-month Although the consensus points to a 0.3% month-on-month growth, the trading platform Kalshi shows a more cautious betting tendency. Traders currently believe that there is a 45% to 47% probability of a month-on-month increase of only 0.2% in January. Looking at the probability distribution, the market is almost certain that CPI will show positive growth - data shows a 94% probability of a positive month-on-month increase, with a 78% probability of exceeding 0.1%. However, the probability of a 0.3% increase is only 14%, while the likelihood of 0.4% or higher is less than 5%. This expectation distribution reflects the market's fine-tuning between "stable inflation" and "slight cooling". Tom Lee, head of research at Fundstrat Global Advisors, pointed out in a recent report that the 2.5% overall CPI level has returned to pre-pandemic normalcy, roughly equivalent to the average from 2017 to 2019. "Even with the lingering effects of tariffs on the data, this is still a 'normal' inflation environment." Lee also emphasized that the current federal fund rate target range is 3.5% to 3.75%, much higher than pre-pandemic levels, indicating that the Federal Reserve has ample room for rate cuts. Goldman Sachs expects that tariffs will contribute about 0.07 percentage points to the core CPI in January, with pressure mainly concentrated in clothing, leisure, home furnishings, education, and personal care products. However, the bank also believes that the overall CPI may be slightly below consensus, with a forecast of only 2.4%. If so, it will further strengthen expectations of moderated inflation. The non-farm employment report released on Wednesday showed an addition of 130,000 jobs in January, with the unemployment rate dropping to 4.3%, sparking concerns in the market about the possibility of overheated labor force suppressing Federal Reserve rate cuts. However, analysts point out that as long as inflation data does not unexpectedly rise, the resilience of employment is not enough to change the expected policy direction. Lee believes that "dovish Federal Reserve support the stock market, in our 'three-stage market' benchmark scenario, US stocks are expected to end the year strongly."