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Fast Comment USCPI data keep inflation jitters alive

  1. Core CPI surprised on the upside with an increase of 0.3% m-o-m; consensus: 0.2% m-o-m
  2. Keeps the possibility of more aggressive Fed tightening alive
  3. Expect USD and yields to rise and stocks to fall
The inflation bogeyman did not go away
Given the recent market turmoil, which to a large extent was driven by increased inflation jitters following the unexpectedly large increase in wages in the latest labour market report, today's CPI data were undoubtedly this week's most anticipated. Unfortunately, the data will do nothing to reduce the current bout of inflation jitters that has shaken financial markets. Core CPI rose 0.3 percent m-o-m in January, above the consensus forecast for a 0.2 percent m-o-m increase, driven to a large extent by the sharpest increase in apparel prices in almost three decades. Overall CPI also surprised on the upside with an increase of 0.5 percent m-o-m. The upside surprise will do nothing to quell the latest tug of war between stocks and bonds and the initial reaction will most likely be higher yields and lower stock prices, while the USD might find some solace.
Largest monthly rise in core CPI since March 2005
The fear of higher inflation will certainly be kept alive by today's figure. Even though there are several technical issues that might have influenced the outcome (such as revised seasonality patterns, adjustments in smart phone prices to account for more rapid technological advancement and the cost index for used vehicles changing from a three-month moving average to a single month price change), the overall message of higher inflation pressure cannot be ignored. If we take the monthly change in core CPI and add more decimals, the increase of 0.34945 percent m-o-m was actually the largest since March 2005. The three and six-month changes in core CPI also surged to highs not seen since 2011, indicating that annual core CPI inflation is following a rising trend, despite the unchanged outcome of 1.8 percent y-o-y in January (see figure below).
Inflation scare adds to pressure on Fed
The higher-than-expected inflation outcome, in combination with the stronger wage data, has the potential to add to current budding market fears that the Fed will bring forward its plan for tightening. At this juncture, our expectations are in line with the Fed's median forecast of three rate hikes this year, but the risk of higher inflation prompted by today's data underpins the possibility that we will see more hikes from the Fed, as long as any market turmoil does not get out of hand. In our latest Global Macro Update, we specifically highlighted the risk of higher inflation and the CPI data do, to some extent, validate this view, even though one month's figure should not be over-interpreted (also meaning that any initial strong reaction to the figure might abate somewhat). However, we do see potential for the trend towards firmer inflation to continue. The next couple of months will see a roll off of the plunge in cell phone prices in March last year, which should add around a couple of tenths to the annual growth rate in core CPI. On top of this, a tightening labour market, a weak USD and fiscally-induced stronger growth should also add tailwinds to inflation. Note that the latest NFIB survey showed a more marked rise in small businesses' actual selling prices and worker compensation, which should begin to feed into underlying pressures over the coming year (see figure).


Jes Asmussen

Chief Economist Denmark

Denmark and The Netherlands

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