US January Consumer Price Inflation Moves Higher in the Month

Highlights:

• All items CPI rose 0.5% month-over-month which was up from a 0.2% gain in December and compared to market expectations of a 0.3% monthly increase. A 5.7% expected jump in gasoline prices was a main contributor to the sizeable monthly increase.
• A stronger-than-expected 0.3% increase in core prices was also a key factor sending the overall monthly increase higher. The January gain followed a 0.2% increase in December with expectations of that monthly increase being maintained in January.
• The stronger-than-expected monthly gain contributed to the overall year-over-year rate remaining unchanged at 2.1%.
• The annual increase in core prices remained unchanged as well at 1.8%.

Our Take:

The January CPI report indicated consumer prices rose a stronger than expected 0.5% in the month. This report will likely abet financial market concerns about rising inflation pressures that emerged last week with wage inflation rising at a pace not seen since 2009. Indications of incipient wage pressures reinforced the view that labour markets are operating beyond capacity with a current unemployment rate of 4.1%. Confirmation of tightening labour markets made an even stronger case for the Fed to continue to tighten policy which weighed on financial markets. Today’s inflation report will raise concerns that this wage pressure is starting to seep into consumer prices. It is the case that the year-over-year rate for core prices remained unchanged at 1.8% and thus below the Fed’s inflation objective of 2%. However, the 6-month average price gain for core consumer prices has jumped to 2.6% from 2.2% in December. This pressure in conjunction with indications of potential wage pressures emerging are expected to keep the Fed tightening. Our forecast assumes that the central bank will raise the fed funds range by 25 basis points at the March FOMC meeting to 1.50% to 1.75%. The tightening is expected to continue through the forecast with similar-sized hikes expected each quarter through the end of 2019 resulting in the fed funds range finishing next year at 3.25% to 3.50%.