CPI Keeps The Door Open For A US 50bp Interest Hike in March

Data released on Thursday showed higher-than-expected inflation numbers with the annual CPI hitting the highest level since 1982.

The upside surprise, even as areas like energy goods and autos cooled as expected, illustrates that inflation continues to carry plenty of momentum, and any meaningful slowdown remains elusive, explained analysts at Wells Fargo.

The inertia in inflation looks increasingly difficult to break. “We continue to believe that inflation will cool somewhat in the coming months beyond the year-ago base effects. As total spending growth slows and shifts toward services, goods inflation is likely to ease from the dizzying rates witnessed this past year”, Wells Fargo noted.

“The moderating effect on the headline should be amplified by the relative importance of core goods having increased with the new weights introduced in today’s report”, Wells Fargo added.

The FOMC has strongly signaled it plans to begin tightening policy at its March 15-16 meeting. How much it may raise the fed funds rate is more uncertain. Today’s report keeps the door open to a 50 bp rate increase in March, but FOMC members will get an additional look at inflation with the February CPI report, released on March 10.

If the latest CPI data shows the peak in inflation has likely been reached, investors could safely anticipate the FOMC will take a more measured approach, opting to raise the fed funds rate by 25 bps in March but signaling additional hikes will be right on its heels.