Higher than expected rise in US inflation risks rate cuts
HOPES of rapid interest rate cuts in the US are fading after inflation jumped more than expected last month.
Consumer prices in December were up by 3.4pc on the year, accelerating from November’s 3.1pc increase.
Energy prices increased in the final month of the year after falling in November, while petrol edged up. Prices are rising quicker than the 3.2pc inflation rate that markets anticipated.
Traders had predicted that the Federal Reserve would accelerate interest rate cuts, particularly as inflation edged closer to the central bank’s 2pc target.
However, economists have since cautioned that stubborn inflation could mean the Fed, led by chairman Jerome Powell, keeps rates at 5.5pc for longer.
Edoardo Campanella, economist at Unicredit, said the rise in inflation “suggests that the last mile in the disinflationary process towards the Fed’s 2pc inflation target will be bumpy”.
He predicts the Fed will hold off until June before bringing rates down.
“The central bank wants to be confident that the 2pc target is not only within reach but that it will be achieved on a sustained basis,” Mr Campanella said. “Still-resilient economic activity and employment means the Fed will be in no immediate hurry to cut rates to support the economy.”
At the same time, the number of new jobless benefit claims edged down from 203,000 to 202,000 last week, defying expectations of a modest rise.
James Knightley, economist at ING, said this further adds to pressure on the Fed to keep rates on hold.
He said: “The combination of the two – slightly firmer inflation and good jobs numbers really brings into doubt the market expectation of a March rate cut from the Federal Reserve.”