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Consumer prices rose more than expected in January, a sign that inflation could be set to return as a feature of the U.S. economy.
In January, consumer prices rose 0.5% over the prior month and 0.3% over last month on a “core” basis, which excludes the more volatile costs of food and gas, according to the latest numbers from the Bureau of Labor Statistics. Wall Street was looking for a 0.3% and 0.2% increase in these figures, respectively.
Compared to last year, the core consumer price index (CPI) was up 1.8%, more than the 1.7% increase that was expected by economists.
Following this news, markets were volatile. After stock futures initially tanked following Wednesday’s data, the major averages had moved into the green during mid-morning trade with the tech-heavy Nasdaq leading gains, rising 0.7%.
Treasury yields were higher, with the 10-year hitting 2.88% and the 2-year hitting 2.14% as bond markets anticipate potentially more aggressive action on interest rate hikes from the Federal Reserve this year. As of December, the Fed expected it will raise interest rates three times this year.
Fears over inflation pressures, and in turn more aggressive interest rate hikes from the Federal Reserve, were seen as the initial impetus for the stock market sell-off that roiled markets last week.
Including all items, CPI rose 2.1% over the prior year in January, more than the 1.9% that was expected by economists. Markets more closely track the “core” numbers as the Federal Reserve prefers to strip out the more volatile costs of food and gas.
In a note following Wednesday’s report, Jim O’Sullivan at High Frequency Economics said, “We expect core inflation to rise this year, but we don’t view this report alone as definitive evidence that the trend is rising. That said, the data raise the already high likelihood that the Fed will be lifting rates again next month — unless turmoil in financial markets intensifies significantly.”
Michael Pearce at Capital Economics said Wednesday’s report is a sign of things to come for the economy, writing Wednesday, “In 3-month annualised terms, core inflation has already reached 2.9%. Once temporary factors drop out of the annual comparison in the spring, core CPI inflation will be close to 2.5% and we expect it to trend higher from there.”
Torsten Sløk, chief international economist at Deutsche Bank, noted in an email on Tuesday that economists surveyed by Bloomberg expect core inflation to average 1.8% in the second quarter of the year, up from 1.5% in the first quarter. Wednesday’s report will likely pull forward expectations for faster inflation even more.