Coming in Hot

Following the relatively solid January Employment Situation report, the market’s undivided attention, at least economic data-wise, then turned to the latest CPI reading. Indeed, with the jobs aspect of the Fed’s dual mandate clearly showing no urgency to cut rates further at this time, the question then turned to the inflation portion of the policy maker’s mission. Well, we all know how that turned out, as the January CPI data showed both headline and core readings coming in hotter than expected.

Following the CPI release, we were asked by some in the media, as well as financial advisors, if we were surprised by the higher-than-expected result for this retail inflation measure. Our answer was not really. It’s not that we’re in the forecasting business per se, but rather, in the last few years, we have witnessed CPI data exhibiting a noticeable pattern to begin the calendar year. In fact, it wasn’t just us who observed this trend; there were also some articles being written about it beforehand.

So, what exactly are we referring to? Beginning in 2022 and carried through to 2024, the monthly and attendant year-over-year readings for CPI produced outsized, and arguably stronger, increases than perhaps were being projected. One could say that the 2022 experience was just the period in which the spike in demand pressures was occurring, so we should disregard that. Okay, but that doesn’t explain what transpired in January of both 2023 and 2024, and now 2025.

A key factor behind this performance appears to lie in the notion that, as a retailer, if you’re going to raise prices, why not do it to begin a new calendar year? Is it that simple? Great question, considering that their underlying price pressures were more than likely going up in the months prior to January, so why not just mark to market?

Even if you’re not completely sold on this explanation, there’s no denying the fact that some type of seasonal pattern seems to be at work. In fact, Fed Chairman Powell has acknowledged this as well. Interestingly, that begs the question as to why the Bureau of Labor Statistics (BLS) hasn’t found a way to adjust for this seasonality. For those of you non-economists out there, typically, the federal government agencies that provide economic data utilize a seasonal adjustment process to try and smooth out such trends. Interestingly, at times, the prior two years of data can be used to help formulate the seasonal adjustment factor (SAF) for a current release. Well, if the BLS employed this approach, its SAF was faulty, or perhaps price pressures were even more than allowed for.

That brings us to the next inflation reading of market importance, the PCE Price Index. As you are probably well aware, this report is the Fed’s preferred gauge to measure price pressures. However, the “final” input into forecasting this indicator comes from the PPI report. While the headline readings for producer prices also came in above expectations, for the most part, some of the key underlying details apparently did not elevate forecasts for the PCE measure as investors witnessed for CPI.

Time will tell. For the record, the next PCE Price Index is due out on February 28.