January CPI Preview: A Strong, But Less Jarring Start to 2025

Summary

Inflation’s early strength in 2024 was a jarring reminder that restoring price stability would not be a quick affair. The January CPI report is likely to show that inflation remained stubbornly strong at the start of 2025. We estimate the headline index rose a “high” 0.3%, which would leave the year-over-year rate unchanged at 2.9%. The core index also looks set for a 0.3% advance that we expect to be driven by the ongoing rebound in goods prices and a pickup in non-housing services.

We expect some lingering issues around residual seasonality to buoy January’s core reading, but we think this dynamic will be less pronounced than last year. Seasonal adjustment factors will be updated with the upcoming release to reflect the most recent year’s price movements. The incorporation of 2024 figures should lead the seasonal factors to “expect” more strength in January and February. Meantime, the somewhat calmer price environment of the past year should lessen the need for businesses to push through big price increases at the start of the calendar year.

If realized, more moderate price increases at the start of this year would unlock favorable base effects and lead to a slowing in the year-over-year rate of inflation in Q1. Yet, we expect the 12-month rate of inflation to move sideways through the remainder of the year, as further services disinflation is offset by higher goods inflation now that additional tariffs are in the works.

January Brings a Change in the Calendar, but Not the Inflation Picture

The first CPI prints of 2024 ended the notion that normalizing supply conditions would be enough to return inflation to the Fed’s 2% target in short order. An upside surprise in January was followed by further strength in the first quarter, and while the 12-month rate of consumer price inflation still managed to slow over the course of 2024, it ended the year little better than where it started (Figure 1). A similar story played out across the PCE price index, with the core up 2.8% year-over-year in the fourth quarter—half a point higher than where the January 2024 Bloomberg consensus estimated it would end the year.

The first major inflation reading for 2025 is likely to show that inflation remains stubbornly strong. We estimate the consumer price index rose a “high” 0.3% in January (0.34% before rounding), which would leave the year-over-year rate unchanged at 2.9%. Energy prices should provide less of a lift to the headline than in December. Although energy services should see another sizable rise following higher natural gas prices (Figure 2), energy goods are poised for a smaller advance based on gasoline prices. The rebound in food inflation since the summer, however, is likely to continue amid the recent months’ rise in food-related commodity prices generally and egg prices particularly.

Excluding food and energy, we estimate consumer price growth picked up relative to December’s 0.2% gain with an increase in January of 0.3% (0.32% before rounding) (Figure 3). The disinflationary impulse from the goods sector continues to fade, and we estimate prices for core goods rose another 0.1% last month. Within core goods, we look for the drivers to be roughly balanced between vehicle prices (+0.2%) and other core goods (+0.1%). Meantime, core services inflation likely picked up a tenth in January (+0.4%), fueled by strength in non-housing services like medical care and travel. We look for primary shelter to rise 0.3% in January, matching December’s gain.

Could Residual Seasonality Fuel Another Upside Surprise this January?

Last January, the core CPI came out of the gate strong, rising a full tenth more than consensus expectations. Some—but not all—of this looked due to residual seasonality, i.e., the inability of seasonal adjustment factors to fully capture regular calendar patterns. Typically, January and February see the largest price increases of the year as businesses update their pricing at the start of the calendar year. However, the need to update pricing more quickly in the pandemic period scrambled the recent historical patterns, leading seasonal factors to not “expect” such outsized strength at the start of the year (Figure 4).

We expect some lingering residual seasonality to buoy January’s core reading, but for this dynamic to be less pronounced than last year. New seasonal factors will be published with the release of the January CPI on February 12, and these will incorporate the monthly (not-seasonally adjusted) price changes observed in 2024. The non-seasonally adjusted increase in the January core CPI was particularly strong last year (the January gain exceeded the calendar year average by 28 bps compared to an average of 16 bps the prior five years). The incorporation of 2024 figures and the rolling off of the 2019 price data should lead the seasonal factors to “expect” more strength this January. In addition, as the overall inflation environment quiets down, the degree to which firms need to raise prices at the start of the year to cover their own costs diminishes. These developments should also help tamp down February’s seasonally adjusted change in the core CPI.

Notably, the more moderate pop in prices that we expect at the start of the year will help unlock favorable base effects when it comes to the 12-month rate of core inflation. If our estimate of a 0.3% monthly increase in the core CPI is realized, the year-over-year rate would still likely manage to round to 3.2% in January, but the read-through to the core PCE deflator would push the 12-month change down from 2.8% to 2.6%.

Yet, the path back to 2% remains bumpy, with risks of roadblocks rising. Higher tariffs promised by President Trump on the campaign trail are now a reality with an additional 10% import duty levied against products from China. Although the 25% tariffs threatened against Mexico and Canada have been delayed a month, the down-to-the-wire decision has nevertheless forced businesses to reckon with the potential for higher input and product costs, and leaves little reason for firms to “give” on pricing now. We expect the year-over-year rate of inflation to tick down in Q1 due to favorable base effects, but for price growth to trend sideways through the remainder of 2025 at a pace still above the Fed’s target (Table). Some further slowing in services inflation remains in train due to the lag in shelter and ongoing moderation in labor costs, but we expect that to be offset by stronger goods inflation as businesses prepare for, and soon face, higher tariffs.