US Inflation Watch: 'January Effect' and Tariffs Threaten Disinflation Narrative

Investors and the Federal Reserve are on high alert ahead of the JanuaryUS Consumer Price Index (CPI) release, with growing consensus among major investment banks that inflation may have accelerated at the start of the year.

Data Snapshot

• Bank of America / Citi Forecast: +0.3%
• UBS Forecast: +0.38%
• Market Consensus: 0.32%
• Fed Target: 2%

Analyst Predictions

Analysts at Bank of America and Citi project core inflation to rise by 0.3% month-on-month, citing the so-called “January Effect”—a seasonal tendency for businesses to reset prices—and the pass-through costs of new tariffs. UBS holds a more hawkish view, predicting a core jump of up to 0.38%, significantly above the market consensus of 0.32%.

Determining the Fed's Path

The data is critical for the Federal Reserve's policy trajectory. While RBC Economics expects headline inflation to slow due to lower gasoline prices, they warn that core inflation is likely holding steady near 2.6%, well above the Fed's 2% target.

High-frequency data suggests a divergence between goods and services:

• Goods Inflation: Expected to rebound due to tariff implications and online price hikes (Adobe Digital Price Index).
• Services Inflation: Remains the wild card. If service sector seasonal price hikes are weaker than historical averages, it could provide the “soft landing” evidence dovish Fed officials need.

Labor Market Fragility?

Compounding the macro uncertainty is the upcoming release of annual payroll benchmark revisions. Federal Reserve Governor Waller and other economists have flagged concerns that strong headline GDP figures may be masking a “K-shaped” recovery and a stagnant labor market over the past year. A significant downward revision in job growth would complicate the Fed's ability to maintain restrictive rates solely to fight sticky inflation.