RBC Economics believes that headline inflation in the U.S. will drop in January because gasoline prices fell by 3% since December. However, core inflation is expected to stay steady at around 2.6%, which is above the Federal Reserve’s target of 2%.
Food and housing costs continue to put pressure on inflation. Food prices are predicted to remain close to 3%, while shelter costs are still above 3%, despite a slight dip in November and December.
Tariffs have had a small effect on consumer prices, but they’re likely to rise through producer prices and supply chains. As of December, core producer price inflation is at 3.5%, which is higher than consumer price growth.
These trends indicate that reaching the desired inflation target will be challenging. RBC Economics warns that both domestic and global economic factors could keep these issues ongoing.
Core inflation is tough to reduce and remains above the Federal Reserve’s 2% goal. The recent jobs report shows that over 220,000 jobs were added in January, suggesting the Fed won’t rush to cut interest rates. This makes significant policy changes unlikely in the first half of the year.
The ongoing food inflation near 3% and rising shelter costs are major worries. We expect that a peculiar trend from last year may reverse by April, causing shelter inflation to increase again. For traders, this means we could see more fluctuations in interest rate futures and treasury bond options.
Looking ahead, producer price inflation is still growing faster than consumer price growth, which may lead businesses to pass on higher costs. A similar situation happened in early 2025 when the market anticipated rate cuts too soon, only for persistent inflation data to change that. This history teaches us that expecting a quick return to low inflation is risky.
In the upcoming weeks, it may be wise to consider strategies that benefit from continued high interest rates, such as buying puts on Treasury bond futures or using interest rate swaps to prepare for delayed rate cuts. With the VIX currently below 15, options pricing may not fully account for the risk of a market shock after next week’s inflation data release. This situation could allow for the purchase of volatility protection at a reasonable cost.
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