Inflation data: US consumer prices accelerate in January; core CPI rises

Higher-than-expected numbers increase pressure on US financial markets

WASHINGTON: US consumer prices rose more than expected in January, with a measure of underlying inflation posting its biggest gain in a year, strengthening expectations the Federal Reserve will have to quicken the pace of interest rate increases this year.

The fairly strong inflation report from the Labor Department on Wednesday put more pressure on US financial markets, which were spooked by a surge in annual wage growth in January. US stock index futures fell more than 1% after the inflation data before paring some of the losses and US Treasury yields rose to session highs.

The dollar rallied against a basket of currencies. Investors worry that inflation, which is seen as being driven by a tightening labour market and increased government spending, could force the Fed to be more aggressive in raising rates this year than currently anticipated.

That would slow economic growth. The US central bank has forecast three rate hikes for this year, with the first increase expected in March.

“The Fed’s job now is to prevent the economy from overheating,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh. “The Fed’s task is complicated by the recent tax cuts and spending deal.”

The Labor Department said its Consumer Price Index increased 0.5% last month as households paid more for gasoline, rental accommodation and healthcare. The CPI rose 0.2% in December. The year-on-year increase in the CPI was unchanged at 2.1% as the large price gains from last year dropped out of the calculation.

Excluding the volatile food and energy components, the CPI shot up 0.3%. That was the largest increase since January 2017 and followed a 0.2% rise in December. The year-on-year rise in the so-called core CPI was unchanged at 1.8% in January, also because of less favourable base effects.

Economists polled by Reuters had forecast the CPI increasing 0.3% in January and the core CPI rising 0.2%.

The core CPI is viewed as a better measure of underlying inflation trends. The Fed tracks a different index, the personal consumption expenditures price index excluding food and energy, which has consistently undershot the central bank’s 2% target since mid-2012.

Published in The Express Tribune, February 15^th, 2018.

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