CPI data is coming! The market predicts that inflation may continue to be higher than the Federal Reserve's 2% target.

Investors and traders are closely watching the upcoming release of the January Consumer Price Index (CPI) data on Wednesday, with the market widely expecting the data to show a slight improvement or remain largely unchanged compared to December 2024. However, certain parts of the financial markets are still signaling that future prices may continue to rise. According to data from FactSet, the five-year breakeven inflation rate, which measures inflation expectations over the next five years, recorded 2.6% on Tuesday and has been consistently above its 50-day and 200-day moving averages since the end of October 2023. This trend indicates that inflation may continue to remain above the Federal Reserve's 2% target in the coming years. Tim Magnusson, Chief Investment Officer and founding partner at Garda Capital Partners, stated that he does not believe inflation will return to the extreme levels seen between 2021 and 2023, but the possibility of inflation remaining above the Fed's 2% target still exists, possibly for months or even years. He referenced the latest consumer expectation data from the University of Michigan, suggesting that consumer concerns about inflation still exist, which may keep the Fed cautious and unwilling to hastily adjust interest rate policies. If the upcoming CPI data exceeds market expectations, even by a small margin, it could potentially impact financial markets and attract high attention from Fed officials. Inflation traders are already anticipating a year-on-year increase of around 2.9% for January's CPI, so any data surpassing this level could push inflation up to 3% or higher, marking the first breach since June 2024. The consensus in the market is that the annual CPI inflation rate for June-November 2024 may remain at 2.9%, indicating that inflation may still remain sticky and difficult to quickly decrease. Additionally, uncertainty surrounding President Trump's policies has heightened concerns about inflation, as investors are unsure whether his tariff plans will actually be implemented and what impact these policies will have on price levels. According to surveys of economists by foreign media outlets, the year-on-year CPI for January is expected to be 2.8%, slightly lower than December's 2.9%, while the core CPI (excluding food and energy prices) is expected to be 3.1%, a slight decrease from 3.2% in December. The monthly increase in core CPI is still expected to be 0.3%, indicating that while inflation may be moderating, it still stubbornly persists. These forecasts suggest that inflation may slightly ease, but if the CPI data surpasses market expectations, investors may need to reevaluate the Fed's policy direction and make adjustments to their market outlook. Fed Chairman Powell testified before Congress on Tuesday, stating that there is no urgent reason for the Fed to adjust rates and emphasizing that it is still unclear whether Trump's tariff plans will be implemented. This statement did not significantly affect market sentiment, as investors still expect the Fed to maintain current interest rates for a longer period until a more pronounced downtrend in inflation emerges. Market analysts believe that when the Fed decides to cut rates, it will continue to monitor a broader range of economic data, not just rely on a single CPI report. Powell's comments suggest that even with a slight easing of inflation, the Fed will not rush to change its current policy stance. Ahead of the CPI data release, the US bond market has already responded, with the yield on the 10-year US Treasury rising to 4.54% on Tuesday, reaching its highest level in at least a week and recording a fourth consecutive day of gains. This trend indicates that market expectations remain cautious regarding inflation and Fed policy. Meanwhile, US stock market performance was mixed, with the Dow Jones Industrial Average rising by 0.28%, the S&P 500 index slightly up by 0.03%, and the Nasdaq Composite index falling by 0.36%. Mark Heppenstall, Chief Investment Officer at Penn Mutual Asset Management, believes that the 10-year bond yield may stabilize around 4.5%, and while the market may react in the short term to the CPI data on Wednesday, it will not lead to a change in long-term trends. He warns investors to be cautious of short-term fluctuations in the bond market and not to overreact. He added that current market uncertainty may lead to both positive and negative impacts on the market, and he expects that bond yields will not significantly decline, as risk aversion sentiment will limit further increases. Heppenstall also pointed out that despite the decline in inflation rates from their peak in 2022, both the market and consumers are still concerned about the long-term impact of inflation. He believes that the market is experiencing a "embedded inflation psychology," with many still shocked by the rapid rise in inflation to 9% seen in 2022. This continuation of inflation psychology may lead to a persistent upward trend in prices and further influence market inflation expectations.