The anticipated rise in January consumer inflation is predicted to be 7.2%, marking the highest increase since 1982.

• The CPI for January is predicted to reveal the highest inflation rate since 1982, which will be announced on Thursday morning.
• CPI is expected to rise by 0.4% or 7.2% year-over-year.
• If the number exceeds expectations and raises the year-over-year number above 7.2%, it strengthens the case for the Fed to act quickly, according to one economist.

In January, the consumer price index is predicted to increase by 7.2%, according to economists' forecasts for another hot inflation report.

The Consumer Price Index (CPI) is expected to increase by 0.4% on Thursday at 8:30 a.m. ET, which is a slower monthly increase compared to December's revised headline gain of 0.6%. Despite this, the year-over-year forecast of 7.2% is the highest since 1982 and is up from 7% in December.

According to Dow Jones, core inflation, which excludes food and energy, is predicted to increase by 0.4% in January, or 5.9% year-over-year. This is in comparison to a monthly increase of 0.6% in December and a year-over-year rate of 5.5% in the last month of the previous year.

Since inflation is viewed as a catalyst for the Federal Reserve's interest rate increases, CPI plays a crucial role in the markets. Economists are basing their projections for the central bank on how much they anticipate inflation will decrease from its current rapid pace. The Fed has stated that it will combat inflation, and it is widely predicted that it will raise interest rates several times this year, beginning with a quarter-point hike in March.

Higher expectations for rate hikes

The anticipation for Federal Reserve rate hikes has increased, especially following the robust January employment report, which revealed 467,000 new payrolls were added in January and there were revisions of 709,000 jobs in November and December.

"According to Tom Simons, economist at Jefferies, the market's pricing in five or 5.5 hikes is a clear sign that the Fed will tighten more this year. If the employment data comes out higher than expected and pushes the year-over-year number higher than 7.2%, it will further argue for the Fed to be aggressive in short order."

If inflation comes in below expectations, how will the Fed respond and tighten this year?

Simons stated that while he doesn't believe the number is highly significant and could alter anyone's perspective, the initial reaction may be negative.

A unique path for rising prices

By March, the annual pace of inflation is predicted to peak, according to economists, due to the end of base effects from weak comparisons.

Since the pandemic has caused inflation to be unique in many ways, economists and the Fed are closely monitoring how inflation decreases and how much of it remains persistent in the economy.

"Michael Gapen, chief U.S. economist at Barclays, stated that he believes the message is that the CPI will be strong for another month, but hopefully a little less than it was in December and below the recent peaks seen in October. He added that they will be closely monitoring goods prices and used cars."

According to economists, January's CPI may reveal the beginning of a trend towards slower inflation of goods and faster-rising prices in services, including housing. This trend is expected to become more evident as 2022 progresses.

Diane Swonk, chief economist at Grant Thornton, stated that wage push inflation is already present in the services sector and will intensify, despite the Fed's belief that supply chain issues and transitory factors will decrease.

She believes that services inflation will not increase as dramatically as perceived. However, Swonk stated that the current heat is intense and things like rents and medical bills will increase.

Fading price shocks in some areas

According to Gapen, some of the pandemic-induced price shocks are expected to begin fading. For example, he anticipates that the price gains for used cars will be another 2.5% in January, but they will then start to decline. This is in contrast to the rapid pace of 3.5% in December. As of December, used car prices had increased by 37% year-over-year. In December, the used vehicle price increase accounted for 1.3 percentage points of the 7% CPI rate, Gapen noted.

The cost of goods should decrease as supply chain issues ease, but services inflation, driven by demand and wage increases, is expected to rise at a rate of 4% this year, surpassing the 3% prepandemic level, according to Gapen.

According to Aditya Bhave, Bank of America senior U.S. and global economist, wages in December increased by 0.7%, which is equivalent to a 5.7% annual growth rate, as stated by the Bureau of Labor Statistics.

"The labor market is tight, and it's not going to get any easier. Finding workers is a challenge, and increasing wages is one solution," he said.

Economists predict that shelter costs, which account for about 40% of the core consumer price index (CPI), will continue to increase.

Bhave stated that in the upcoming quarters, our expectation is that price inflation may slightly normalize as the idiosyncratic factors lessen. At some point, wages will grow at a faster rate than prices, which will be beneficial for the economy.

During the pandemic, consumer spending on goods and services shifted, with goods services reaching 41% in early 2021. However, this has since decreased to 39%.

The increase in price of goods was due to supply chain issues.

"Gapen stated that within core CPI, approximately 75% is services and 25% is goods. Prepandemic services inflation was around 3%, while wages were between 2.5% and 3%. Currently, services inflation is running at about 4%. According to Gapen, services inflation is in line with what is being seen in wage data and rental inflation data."

In December, the year-over-year increase in shelter costs was 4.1%, and economists predict a further rise in January.

Where do we land versus the Fed's target?

Bhave anticipates a below-consensus 0.3% increase in core CPI for January, while expecting inflation to slow but not as much as some forecasters. Additionally, Bank of America economists predict an above-consensus seven Fed rate hikes this year.

He stated that his forecast for personal consumption expenditures inflation data, closely monitored by the Fed, is 3% by year's end, which is significantly higher than the central bank's projections of 2.6%.

"The bigger question is... how do we navigate the current economic situation?" he said. "Our analysis indicates that we are still above the Fed target due to persistent supply chain disruptions and cyclical improvements in the economy, which will likely result in inflation increases in certain areas."

Both new and used automobiles should be soft in January, said B. Additionally, the omicron Covid variant could have negatively impacted travel and leisure prices last month, he stated.

In January, it was predicted that there would be less of a bounce in apparel prices, household goods, and furnishings than usual.

Bhave stated that the absence of holiday discounts last year was due to supply issues during the pandemic, which means that the current seasonal factors will not result in a larger bounce than expected.