Synopsis:

Morgan Stanley expects a firmer-than-consensus January CPI report, forecasting core CPI at 0.37% MoM (3.2% YoY) due to temporary factors like wildfires and residual seasonality. Headline CPI is projected at 0.35% MoM (2.9% YoY), slightly below core due to softer energy and food prices.

Key Points:

1. Core CPI Expected at 0.37% MoM (vs. 0.3% consensus)

   • Annualized core inflation to rise to 3.2% YoY.
   • Both core goods and services expected to come in firmer than recent trends.
   • Temporary factors like wildfires and seasonal adjustments contribute to short-term inflation acceleration.

2. Headline CPI Forecast at 0.35% MoM (2.9% YoY)

   • Lower food and energy prices keep headline inflation below core CPI.
   • Non-seasonally adjusted CPI index projected at 317.416.

3. Market & Fed Implications:

   • A higher-than-expected core CPI could reinforce the Fed’s cautious approach on rate cuts.
   • Temporary factors could fade, but persistent services inflation might keep markets on edge regarding the timing of Fed easing.

Conclusion:

Morgan Stanley sees temporary factors lifting inflation in January, but underlying trends remain sticky, particularly in services. If realized, this report could keep USD supported and push back expectations for early Fed rate cuts.