The expected increase comes as markets await Tuesday's report, which could leave investors jittery about whether the Fed will stick with smaller interest rate hikes or turn more aggressive to cool the economy. Rising gasoline costs and persistent price pressures across the economy are partly responsible for inflation's staying power.
Nobel Prize–winning economist Paul Krugman forecast in a tweet Sunday that the report would show "a significant uptick" in inflation, but cautioned that Tuesday's numbers likely will lack enough data to accurately predict inflation's future path. While prices likely rose, Krugman wrote, it will be "for reasons that tell us little about how we're actually doing on inflation."
Predicting inflation's trajectory has proven risky and has tripped up many economists in recent years. Krugman himself has admitted making mistakes in 2021, when he and others forecast that inflation would be a fleeting factor in the U.S. economy that would wane soon enough. Some economists warned that soaring inflation last year would require a severe recession and a sharp rise in unemployment to fix, but Krugman remained optimistic about the Fed's chances of engineering a soft landing and averting a deep recession—predictions so far validated by the economy's relative health this year.
The road to taming inflation remains long despite recent positive news, and bumps are almost inevitable. "The disinflationary process, the process of getting inflation down, has begun," Fed Chair Jerome Powell said last week, but added: "It has a long way to go. These are the very early stages."
The expected January rise comes down to prices for some items rising after months of declines that may have been temporary. Krugman pointed to a recent reversal in used car prices, which rose 2.5% between December and January after falling 15% in 2022. Gasoline prices have also risen around 4% since last month, ending months of declines since prices peaked last year when the Ukraine War scrambled energy markets.
Temporary factors that kept inflation down in recent months are fading, Krugman wrote, leading to an uptick in prices. But that does not necessarily mean inflation is set to soar to another 40-year high as it did last summer.
Shelter costs, which the Bureau of Labor Statistics uses to measure housing prices, may be deceivingly high on paper. U.S. housing costs have fallen significantly in the past few months after soaring in 2021 and early 2022, but official shelter costs that factor into inflation calculations are expected to stay high for the next few months, as housing price measurements tend to lag behind actual market costs.
Analysts said that while inflation is set for an uptick, it does not mean the fight against rising prices has been lost. While shelter prices and a tight labor market will continue applying upward pressure to inflation, "underneath the surface, many of the cyclical subcomponents driving CPI appear to be headed in the right direction," Jason Pride, chief investment officer of private wealth at Glenmede, told Fortune.
A recent adjustment to how often the Bureau of Labor Statistics weighs price changes in different years may also lead to a higher-than-expected inflation reading this week, but it does not mean the Fed's plan to reduce inflation has been tainted. "Core inflation should move higher again in January as core goods deflation takes a pause and methodological changes boost the housing component," analysts at Morgan Stanley wrote in a note last week. ""
An uptick in prices last month would show that the path to bringing inflation to manageable levels is long and uneven, but by and large things are still going to plan, the Morgan Stanley analysts wrote. "My baseline view is that the economy is still probably running unsustainably hot, and that inflation is down substantially but probably running above target," Krugman wrote.