Firm­ing US in­fla­tion keeps Fed rate hike on the ta­ble

The Pak Banker - - COMPANIES/BOSS -

Ris­ing rents and health­care costs lifted un­der­ly­ing U.S. con­sumer price in­fla­tion in Jan­uary by the most in nearly 4-1/2 years, pro­vid­ing sup­port for the view that the Fed­eral Re­serve could grad­u­ally raise in­ter­est rates this year as fore­cast.

The La­bor Depart­ment said its Con­sumer Price In­dex, ex­clud­ing the volatile food and en­ergy com­po­nents, in­creased 0.3 per­cent last month, the big­gest gain since Au­gust 2011, fol­low­ing a 0.2 per­cent rise in De­cem­ber.

"This was a firm, broad-based rise in core in­fla­tion that should dis­pel the no­tion, ev­i­dent in mar­ket-based mea­sures of in­fla­tion com­pen­sa­tion, that the econ­omy can't gen­er­ate any in­fla­tion," said Omair Sharif, rate sales strate­gist at SG Amer­i­cas Se­cu­ri­ties in New York.

In the 12 months through Jan­uary, the core CPI ad­vanced 2.2 per­cent, the largest rise since June 2012 and ex­ceeded the 1.9 per­cent av­er­age an­nu­al­ized in­crease over the last 10 years.

The core CPI was up 2.1 per­cent in De­cem­ber from the year ear­lier. The Fed has a 2.0 per­cent in­fla­tion tar­get and mon­i­tors a price mea­sure that is run­ning well below the core CPI.

The over­all CPI was un­changed in Jan­uary af­ter slip­ping 0.1 per­cent in De­cem­ber. The CPI in­creased 1.4 per­cent in the 12 months through Jan­uary, the big­gest rise since Oc­to­ber 2014, af­ter gain­ing 0.7 per­cent in De­cem­ber.

The year-over-year in­fla­tion rate is ris­ing as the slump in world oil prices in the past year is wash­ing out of the cal­cu­la­tion.

Fall­ing com­mod­ity and stock prices in the past few weeks, along with slow­ing do­mes­tic and global eco­nomic growth, had un­der­mined mar­ket ex­pec­ta­tions for fur­ther Fed­eral Re­serve in­ter­est rate rises this year ahead of the cen­tral bank's next pol­icy meet­ing on March 15-16.

The Fed lifted its bench­mark overnight in­ter­est rate from near zero in De­cem­ber, the first rate hike in nearly a decade.

While Fed of­fi­cials have wor­ried about in­fla­tion be­ing too low, they have also main­tained that the fac­tors hold­ing back in­fla­tion are tran­si­tory.

But the rise in the core CPI in Jan­uary, to­gether with a tight­en­ing la­bor mar­ket, sug­gest fur­ther mon­e­tary pol­icy tight­en­ing this year can­not be ruled out.

"It is a pol­i­cy­maker's dream come true, they wanted more in­fla­tion and they got it. The stronger in­fla­tion re­port puts a rate hike back on the ta­ble at the March meet­ing," said Chris Rup­key, chief econ­o­mist at MUFG Union Bank in New York.

US stock prices dipped on Fri­day, hurt by a drop in oil prices, and yields on shorter-dated U.S. Trea­sury debt rose, with in­vestors di­gest­ing the in­fla­tion data that could raise prospects for fur­ther in­ter­est rate hikes this year. The U.S. dol­lar slipped against the euro and yen though.

Un­der­ly­ing in­fla­tion was last month boosted by a 0.3 per­cent in­crease in ten­ants' rent, which fol­lowed a sim­i­lar gain in De­cem­ber. Med­i­cal care costs rose 0.5 per­cent, with prices for pre­scrip­tion drugs also in­creas­ing 0.5 per­cent. The cost of doc­tor vis­its edged up 0.1 per­cent af­ter fall­ing 0.2 per­cent in De­cem­ber and hos­pi­tal costs rose 0.4 per­cent.

Ap­parel prices shot up 0.6 per­cent, the largest gain in two years, af­ter fall­ing for four straight months. The in­crease in ap­parel is sur­pris­ing as re­tail­ers have been of­fer­ing deep dis­counts to sell un­wanted in­ven­tory.

Prices for new mo­tor ve­hi­cles ad­vanced 0.3 per­cent. There were in­creases in the cost of to­bacco and recre­ation, but prices of house­hold fur­nish­ings dipped.

Though some econ­o­mists were skep­ti­cal that the rise in core CPI would be sus­tained, re­vi­sions to the in­fla­tion data showed un­der­ly­ing in­fla­tion a bit firmer in the last months of 2015 than pre­vi­ously re­ported.

Fol­low­ing the strong core CPI read­ing, econ­o­mists said they ex­pected the Fed's pre­ferred per­sonal con­sump­tion ex­pen­di­tures (PCE) price in­dex, ex­clud­ing food and en­ergy, to in­crease 0.2 per­cent in Jan­uary af­ter slip­ping 0.1 per­cent in De­cem­ber.

The core PCE was fore­cast ris­ing 1.6 per­cent in the 12 months through Jan­uary af­ter in­creas­ing 1.4 per­cent in De­cem­ber. The Com­merce Depart­ment will re­lease the Jan­uary PCE data next Fri­day.

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