Friday could be a big day for the stock market, as an important and closely watched government report will be published before markets open. And it may push asset prices up or down dramatically.
I'm talking about the Consumer Price Index (CPI) data that comes out every month. This is the major gauge of inflation in the U.S. economy, and the January data will be published on Friday, Feb. 13 at 8:30 a.m.
There are many ways to look at the data, of course, but probably the most closely monitored number of the report is core CPI, which excludes food and energy prices because they tend to be highly volatile. Leaving those items out of the data provides a more insightful number for year-over-year and month-over-month comparisons.
Core CPI rose 2.6% year over year in December, a four-year low. This Friday markets will be looking for additional evidence that inflation crept lower still in January. And right now that looks like a real possibility, as the Cleveland Fed is estimating core, year-over-year inflation of 2.45% for January.
If that's what Friday's data indicate, the stock market should climb higher, maybe even dramatically, on investor hopes for additional Federal Reserve cuts this year.
A good number Friday will raise hopes for more Fed rate cuts
Right now, the futures market is pricing in two additional quarter percentage point cuts to the Fed's target interest rate in 2026. But the market would react very positively if inflation fell further in January, as it would give the Fed room to cut the target rate even more.
The Fed routinely says its monetary policy is data dependent. That is, if the data tell Fed officials that inflation is under control, they can cut rates (conversely, if the data say inflation is rising again, the Fed would lean toward increasing rates).
Two of the major worries investors have right now about the economy are inflation related. Consumer spending has slowed among a big portion of Americans. It turns out that the top 10% of income earners now account for nearly half of all consumer spending in the U.S. That's not a sustainable situation, though it will likely remain that way until inflation cools further and middle-class Americans stop worrying about rising prices, an issue that has come to be known as "affordability."
Image source: Getty Images.
The other worry investors harbor centers on the Trump administration's tariffs on imports and the impact they could have on inflation. Widespread fears of tariff-driven inflation have calmed in recent months as it has not shown up in the data -- at least, not yet. Many of the new tariffs have been postponed or haven't yet taken affect. Friday's report -- if it shows inflation continuing to moderate -- will be further evidence for investors that the tariffs are not as damaging as once feared.
It's not uncommon for the CPI report to move the S&P 500 index and other market gauges. This one will be a report worth watching, to be sure.
