Economists, Betting Markets Predict Benign January Inflation: What Could Go Wrong This Time?

Economists and betting markets are leaning toward a mild January inflation report, fueling investor hopes that price pressures are cooling and the Federal Reserve could stay on track for interest rate cuts.

The headline Consumer Price Index is expected to hold steady at 2.9% year-over-year, according to median economist forecasts tracked by TradingEconomics. On a monthly basis, inflation is projected to rise by 0.3%, slightly cooling from December's 0.4% gain.

Core inflation, which excludes volatile food and energy prices, is anticipated to ease from 3.2% to 3.1% year-over-year, marking the first annual decline in core CPI since July 2024. However, on a monthly basis, core inflation is expected to rise 0.3%, slightly above December's 0.2% increase.

Ahead of the January inflation report, markets are fully pricing in just one rate cut by the end of the year, while the probability of two reductions by December 2025 stands at about 50% as per the CME FedWatch tool.

What Do Betting Markets Expect?

Kalshi, a CFTC-regulated betting market platform, reflects similar expectations, with odds slightly favoring a 2.9% CPI reading.

The probability of inflation exceeding 2.9% stands at 2-to-1 odds, while an even surprisingly hotter print above 3.0% would yield a $53 return on a $10 wager.

Meanwhile, betting markets assign a 62% probability to core CPI exceeding the 3.1% economist consensus, reflecting concerns about persistent underlying price pressures.

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Wall Street Weighs Key Inflation Drivers

Economists from major banks are analyzing key components of the January inflation report, with a particular focus on goods prices, shelter costs, and services inflation.

Bank of America economist Aditya Bhave expects core goods prices to rise, largely due to higher new and used car prices, which are forecasted to increase by 0.3% and 2.0% month-over-month, respectively. Yet, outside the auto sector, core goods prices are generally expected to decline amid improving supply conditions.

Shelter inflation, which has been a persistent driver of price pressures, is also under scrutiny. Bhave projects core services inflation to tick up to 0.4% month-over-month in January.

He highlighted that the Bureau of Labor Statistics has been increasing the weight of single-family detached homes within the Owners' Equivalent Rent (OER) calculation each January, while reducing the weight of multifamily units. Other service components are also expected to show modest acceleration.

“We remain comfortable with our forecast that the Fed cutting cycle is over. Inflation is stuck above target, with risks skewed to the upside, activity is strong, and the labor market appears to have stabilized around full employment,” Bhave wrote in a Tuesday report.

Goldman Sachs economist Jessica Rindels anticipates a slightly hotter-than-expected inflation print, forecasting a 0.34% increase in core CPI for January, compared to the 0.3% consensus estimate.

She expects headline CPI to rise 0.36% month-over-month, driven by a 0.4% increase in food prices and a 0.6% jump in energy prices.

Looking ahead, Goldman Sachs expects “further disinflation in the pipeline over the next year from rebalancing in the auto, housing rental, and labor markets, but an offset from an escalation in tariff policy.” 

What This Means For The Fed

Michael Rosner, managing director at Raymond James, suggests that while the report will influence the Fed's thinking, markets may still be six to eight months away from the first rate cut.

Unless economic conditions change significantly, he indicates the central bank will stick to its “wait and see” approach.

Ed Yardeni, president of Yardeni Research, highlights a seasonal factor that could push inflation higher in January.

“Businesses tend to raise prices at the beginning of the year; that could result in January CPI and PPI releases (Wed and Thu) that are hotter than expected even though both are seasonally adjusted,” Yardeni said.

He added that some Federal Reserve officials have recently expressed concerns that tariffs could disrupt progress toward the Fed's 2% inflation target.

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