Forget CPI: This Markets Signal Warns of Prolonged Inflation

Investors Eye CPI Report as Inflation Concerns Linger

As investors brace for January’s consumer price index (CPI) report, financial markets remain on edge over persistent inflation concerns. While expectations suggest little change or a slight improvement from December, one key indicator continues to flash warning signs.

The five-year breakeven inflation rate—a measure of expected inflation over the medium term—stood at 2.6% on Tuesday and has remained above its 50- and 200-day moving averages since late October, according to FactSet data. This suggests inflation could stay above the Federal Reserve’s 2% target for years.

“There’s still some lingering sticker shock from the 2021-22 inflation spike,” said Mark Heppenstall, chief investment officer at Penn Mutual Asset Management. “People are still adjusting to how quickly inflation surged to 9% in 2022.”

Tim Magnusson, chief investment officer at Garda Capital Partners, echoed similar concerns. “While inflation is unlikely to return to 2021-23 levels, it’s possible it could stay well above the Fed’s target for months or even years,” he said, citing recent consumer expectations data from the University of Michigan. “If that’s the case, the Fed may have to keep rates steady for longer.”

Markets are closely watching Wednesday’s CPI report, with traders expecting an annual headline inflation rate of 2.9%. Even a slight upside surprise could push that figure to 3% or higher—the highest since June 2024—potentially unsettling financial markets and drawing the Fed’s attention.

Economists surveyed by The Wall Street Journal anticipate annual headline and core inflation rates of 2.8% and 3.1%, respectively, down slightly from December’s 2.9% and 3.2%. The monthly core reading is expected to hold steady at 0.3%.

Federal Reserve Chair Jerome Powell, speaking before Congress on Tuesday, emphasized there’s no urgency to adjust interest rates and noted that the impact of President Donald Trump’s proposed tariffs remains uncertain.

Treasury yields climbed to their highest levels in over a week, with the 10-year yield reaching 4.54% after four consecutive days of gains. Meanwhile, stocks ended mixed: the Dow Jones Industrial Average rose 0.28%, the S&P 500 edged up 0.03%, and the Nasdaq Composite fell 0.36%.

Heppenstall suggested the 10-year yield may stabilize around 4.5%, advising investors to avoid overreacting to the CPI data. “There will be ongoing back-and-forth on policy from the administration, with some days looking favorable and others negative,” he said. “I don’t expect yields to drop significantly, but a risk-off environment will also limit how high they can go.”