Over the past twelve months, consumer prices increased more than was expected. It indicates that inflation is on the rise and enhances the possibility of significant interest rate increases this year.
Thursday’s Labor Department report showed that the consumer price index of January which gauges the prices of various everyday consumer goods rose 7.5% in comparison to a year ago.
It was compared to Dow Jones estimates at 7.2%, for the closely-watched inflation gauge. This was the most recent reading since 1982.
CPI increased by 6% after excluding volatile grocery and gas costs. That compares to 5.9%. Inflation core rose to its highest point since August 1982.
Also, the monthly CPI rate rates came back hotter that expected. The headline and core CPI rose 0.6% respectively, in contrast to 0.4% increases by either measure.
The report impacted tech stocks that are rate sensitive, causing stock market futures to decline. The benchmark 10-year Treasury note touched 2% on August 2019, its highest level since August 2019; this was a sharp rise in government bond yields.
In the future, markets will be more aggressive when it comes to raising rates.
CME data shows that there are 44.3% chances for a Fed rate hike in March, up from 25 percent just prior. This year’s chances of seeing a six-quarter point increase in Fed rates rose to around 63%, up from 53% just before.
Barry Gilbert, LPL Financial’s asset allocation strategist, stated that markets are still concerned by an aggressive Fed after a surprise rise in inflation in January. While things might improve from now, markets will continue to be concerned about Fed tightening until they see clear signs of inflation under control.
Prices for food and shelter are on the rise
Inflation numbers are at an important crossroads in the U.S. Economy. 2021’s fast growth rate is expected to slow as fiscal stimulus and monetary stimulation fade. While growth will remain in line with the trend, a Fed that is fighting inflation could lead to faster rate increases.
Petroleum oil grew the fastest in January at 9.5%. This is part of an overall 46.5% increase year-over-year. Overall, energy costs were up 0.9% and 27% respectively for January.
Since they started rising in spring 2021, vehicle costs have been a major contributor to inflation. In January, new vehicles were unchanged while used trucks and cars saw an increase of 1.5%. Over the past twelve months, both categories saw respective increases of 12.2% & 40.5%.
Shelter costs (which make up around one-third the total CPI number) increased 0.3% in December, the slightest gain since August 2021. However, this category saw an inflation increase of 4.4% during the previous year. This could continue to drive up inflation in the future.
The month’s food costs increased 0.9% and were up 7% in the last year.
The combination of high food and housing prices “underlines the view that there is a rapid cyclical acceleration and inflation, and with labor market conditions extraordinarily tight, it’s unlikely to slow down,” said Andrew Hunter, senior U.S economist at Capital Economics.
He said that while we expect core inflation to fall this year due to more positive base effects, and an easing of the supply shortages, it suggests that it will stay well above Fed’s target for a long time.”
This has dampened the substantial earnings growth that workers have experienced. The 0.6% inflation increase almost erased the 0.7% month-on-month gain in real hourly earnings.
Separate data Thursday revealed that the weekly number of jobless claims was 223,000 in the week ending February 5. This is a decrease of 16,000 over the previous week, and lower than the 230,000 estimation. The lowest level since Jan.
1.62 Million people are still claiming continuing claims. These claim numbers have been delayed by one week. Labor Department data as of January 22 showed that the number of beneficiaries for all programs rose to 2.1million.