RBC Economics suggests January U.S. headline inflation will decline due to a 3% drop in gasoline prices from December. However, core inflation is expected to remain steady at around 2.6%, which is over the U.S. Federal Reserve’s target of 2%.
Food and shelter prices continue to exert pressure, with food inflation predicted to stay near 3%. Shelter inflation remains above 3%, although it was slightly reduced in November and December.
Impact On Consumer Prices
Tariff effects on consumer prices have been limited but are anticipated to increase through producer prices and supply chains. Core producer price inflation remains at 3.5% as of December, surpassing consumer price growth.
These factors point to ongoing challenges in achieving the desired inflation target. RBC Economics’ insights suggest that these trends could persist, emphasising the impact of both domestic price changes and external economic influences.
We are seeing that core inflation is proving difficult to bring down, remaining firmly above the Federal Reserve’s 2% goal. The strong January jobs report released last week, which showed the economy added over 220,000 jobs, reinforces the view that the Fed has no reason to rush into cutting interest rates. This makes any significant policy easing in the first half of the year highly unlikely.
Opportunities And Risks
The persistence of food inflation near 3% and shelter costs running even higher are key areas of concern. We anticipate that as a methodological quirk from late last year reverses by April, shelter inflation could actually re-accelerate, adding to price pressures. For traders, this suggests continued volatility in interest rate futures and options on treasury bonds.
Looking at the pipeline, we see that producer price inflation is still outpacing consumer price growth, suggesting businesses may still pass on higher costs. We saw a similar dynamic in early 2025 when the market prematurely priced in rate cuts, only for sticky inflation data to force a rapid repricing. This historical lesson implies that betting on a swift return to low inflation is a risky proposition.
In the coming weeks, we should consider positions that benefit from sustained high interest rates, such as buying puts on Treasury bond futures or using interest rate swaps to guard against a delayed cutting cycle. With the VIX currently hovering below 15, options pricing seems to underestimate the potential for a market shock following next week’s inflation data release. This environment may present an opportunity to purchase volatility protection at a reasonable price.
