Sun, Feb 21, 2016 - Page 13 News List

Firm US inflation makes Fed rate hike likely

CHANGES:Some US Federal Reserve officials have said that inflation could be too low, but they also maintained that factors holding back the CPI were likely fleeting

Reuters, WASHINGTON

Rising rents and healthcare costs lifted underlying US consumer price inflation last month by the most in nearly four-and-a-half years, providing support for the view that the US Federal Reserve could raise interest rates this year as forecast.

The US Department of Labor on Friday said the Consumer Price Index (CPI), 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 last year.

“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,” SG Americas Securities rate sales strategist Omair Sharif said.

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

The core CPI was up 2.1 percent in December last year 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 last month after slipping 0.1 percent in December last year. The CPI increased 1.4 percent in the 12 months through last month, the biggest rise since October 2014.

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 international economic growth, had undermined market expectations for further Fed interest rate rises this year ahead of the central bank’s next policy meeting on March 15 and 16.

The Fed lifted its benchmark overnight interest rate from near zero in December last year, 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 likely only transitory.

However, the rise in the core CPI, 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,” MUFG Union Bank chief economist Chris Rupkey said.

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 last year 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 last month after slipping 0.1 percent in December last year.

The core PCE was forecast rising 1.6 percent in the 12 months through last month, after increasing 1.4 percent in December last year. The US Department of Commerce is scheduled to release last month's PCE data on Friday next week.

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