US Inflation and CPI Forecasts: 2nd Reading for 2025 Amid Trump Tariff Storms

• Global markets are awaiting the second inflation reading for 2025, considering three potential scenarios. 
• Analysts are monitoring Trump’s policies and other economic indicators as potential inflation risks. 
• This will be the first reading under Trump and after the launch of his aggressive foreign policy.

U.S. Inflation Data Sparks Concerns Over Trade Wars and Rising Costs:

Financial markets are closely monitoring the release of the second U.S. inflation reading for 2025, set for tomorrow, Wednesday, amid heightened concerns about the potential for a trade war that could drive up prices both domestically and globally.

Current expectations suggest that the annual inflation rate will stabilize at 2.9%, with a slight monthly decrease to 0.3%. This comes in contrast to anticipated increases in core inflation, which excludes food and energy prices.

It is worth noting that inflation began rising again in November 2024 after reaching a low of 2.4%, near the target rate of 2%. This led markets to anticipate further interest rate cuts by the Federal Reserve in 2025. However, subsequent developments have dampened expectations regarding both inflation trends and the Fed's potential actions on interest rates this year.

Commodities and food prices have increased, while the service sector's price levels have remained elevated. The upcoming inflation index release is expected to remain high, largely due to rising costs of essential goods such as new and used cars.

Additionally, there are growing concerns that inflationary pressures may intensify, particularly in light of former President Trump's efforts to implement campaign promises related to foreign financial policies. Analysts suggest that these tariffs could drive up inflation, particularly for intermediate goods like steel, aluminum, and energy, thus increasing input costs and driving up prices across supply chains.

Such tariffs may also adversely affect inflation by raising the cost of key consumer goods, including new cars, many of which are imported from Mexico by U.S. and foreign automakers.

Furthermore, market index readings could influence inflation rates, particularly in relation to wage growth, which saw a significant rise in the latest data. This increase in wages has the potential to amplify inflationary pressures by boosting the purchasing power of American consumers.

How Inflation Readings Impact Markets?

During the Federal Reserve’s most recent meeting in 2024, the central bank expressed a willingness to consider modest interest rate cuts, averaging half a percentage point. This reflects the significant impact that future inflation data will have on market expectations, as each adjustment—either an increase or decrease—from the current rates could present different scenarios for the markets.

Neutral Scenario: Inflation Data in Line with Expectations

If inflation readings align with market expectations, this scenario may prove to be the most favorable, particularly since markets are currently anticipating fewer interest rate cuts for 2025. According to the CME Group's FedWatch US Interest Rate Potential Pricing Tool, the market predicts the first-rate cut will occur during the July 2025 meeting, with a 43% probability, compared to a 38% likelihood that rates will remain unchanged on that date. The tool also indicates that markets expect the Fed to maintain current interest rates during the upcoming March meetings with a 93% probability, and during May meetings with a 75% probability.

Worst Case Scenario: Inflation Higher Than Expected

A scenario in which inflation exceeds expectations poses a significant challenge for the markets. This could raise concerns about the Fed’s future monetary policy and reduce expectations for interest rate cuts, particularly considering the uncertainty surrounding the economy due to factors such as tariffs and recent robust labor market data. Such an outcome would likely have a negative impact on riskier assets, while benefiting safe-haven assets like gold. Additionally, a stronger U.S. dollar could emerge, potentially creating challenges for major currencies, including the euro.

Best Case Scenario for the Fed: Inflation Lower Than Expected

If inflation falls below expectations, it will provide a boost to the stock markets, as investors would likely anticipate more significant interest rate cuts from the Federal Reserve. This outcome could also exert downward pressure on the U.S. dollar, especially against the Japanese yen, as markets adjust to the potential financial policies the Bank of Japan might implement in response.