Proactive Investors - With inflation not falling as much as the market had hoped for in January on top of a blowout jobs report, there are renewed concerns that the Federal Reserve will up its hawkishness in regard to its monetary policy in the coming months.
On Tuesday, the consumer price index (CPI) reading for January came in slightly higher than expected at 0.5% month-over-month and 6.4% year-over-year. The market had been expecting increases of 0.5% and 6.2%, respectively.
The core index, which excludes the food and energy components, rose 0.4% month-over-month, on par with the Street’s expectation. Core inflation came in up 5.6% over the 12 months to January, ahead of the expected 5.4%.
Stubborn inflation could see Fed push back
BRI Wealth Management portfolio manager Tom Hopkins said January's inflation reading was proving that inflation is stubborn and it’s an important indicator as to how many more 25 basis point rate hikes might be in the pipeline as the Fed looks to push inflation back to its 2% target.
“I expect the Fed to further tighten monetary policy as they are still far from achieving price stability,” he said.
Hopkins added that, after an unexpectedly strong jobs report for last month, this could stoke the Fed to be more aggressive in its tightening monetary policy to cool the economy more effectively.
“The enduring strength of the US labour market combined with a gradual easing of inflation has raised hopes that the American economy might avoid a recession, but Fed officials have always cautioned that such an outcome is far from guaranteed,” he said.
“I suspect the hawkish rhetoric to continue from the Federal reserve.”
Fidelity International global head of macro and strategic asset allocation Salman Ahmed said the latest slightly above consensus CPI released showed inflation momentum remaining strong as the pace of decline in the speed of disinflation slowed.
“Core services (excluding) shelter inflation, the Fed's new preferred measure, was affected by an outsized drag from medical care services, but other categories remain firmly above target and not yet responding meaningfully to the tightening the Fed has delivered so far,” Admed said.
“With a super-hot labour market leading to the risk that inflation becomes sticky again, we think Fed is likely to up its hawkishness to bring inflation down towards the target.”
Interest rate hikes higher than 25 bps 'cannot be ruled out'
ADSS head of sales trading Neal Keane also highlighted that US CPI holding relatively flat at 6.4% showed that the Fed’s fight against inflation has met some headwinds as it tries to move closer towards its 2% inflation target.
“The current expectation is for another 25 bps raise in interest rates, given their signal that the fight with inflation is far from over, higher increases than 25 bps cannot be ruled out,” Keane said.
“Markets will reassess recent peak inflation themes, and with more strong US data likely to force the Fed to continue to hike rates for longer, we can expect further stock market weakness, a stronger dollar, and weaker commodities.”
Pantheon Macroeconomics chief economist Ian Shepherdson added that the report would not change anyone's mind about the inflation picture.
“Both hawks and doves will find something to highlight,” he said. “It does not change the very high likelihood of a 25bp hike in March, and it says nothing about May; that’s too far off.”