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The current annual inflation outlook in the US economy lends further credence to an incoming interest rate hike by the Federal Reserve.
According to the US Labor Department, annual inflation in the United States went up by 7.5% after the consumer price index for all items inched upwards by 0.6% in January. In addition, the increase in consumer prices over the last 12 months also strongly suggests that the Federal Reserve would substantially hike interest rates this year. Asset allocation strategist at LPL Financial, Barry Gilbert, posited:
“With another surprise jump in inflation in January, markets continue to be concerned about an aggressive Fed. While things may start getting better from here, market anxiety about potential Fed overtightening won’t go away until there are clear signs inflation is coming under control.”
Furthermore, the increase in the consumer price index, a measure of the cost of several regular consumer goods, exceeded the Dow Jones estimate of 7.2%. Additionally, the 7.5% recorded for the closely-watched inflation gauge represents the highest reading in 40 years.
Annual Inflation Rate by the Numbers
The CPI registered an increment of 6% compared with the general consensus estimate of 5.9%. However, this does not take the cost of groceries and volatile gas into account. Meanwhile, core inflation also rose at its fastest level since August 1982. On a monthly basis, the CPI rate of 0.6% for both headline and core indexes surpassed the 0.4% estimated increase by both measures.
Ahead of rising interest rates, the markets also got more aggressive, with fuel oil rising the most in January. It surged by 9.5% as part of a 46.5% YoY increase, while overall energy costs rose 0.9% for the month and 27% for the year. Meanwhile, the cost of food was up by 0.9% for the month and 7% over the past year. Shelter costs increased by 0.3% on the month, its smallest gain since August last year, just below December’s rise. Shelter, which makes up a third of the total CPI number, went up 4.4% over the past year. It could potentially keep inflation readings elevated in the future.
The recent CPI report also increased the potential percentage point Fed increase. For instance, it rose to 44.3% from a 0.5 percentage point in March. According to CME data, this is compared to the previously given estimate of 25%. Furthermore, the chances of a sixth quarter-percentage-point hike in 2022 also surged to about 63%. Once more, this compares to the approximately 53% given just before the CPI release.
Looming Fed Interest Rate Hike
The US economy now has an inflationary threat to deal with alongside the after-effects of a tapering Covid-induced fiscal and monetary stimulus policy. Due to this, all indications point to a substantially slower economic growth pace compared with 2021. Although the US economy still expects to see some growth above trend, the Fed’s looming sharp interest rate hike could pose a headache.
Following the CPI report, stock market futures also declined, with rate-sensitive tech stocks being hit hardest. In addition, there was a sharp rise in government bond yields, with the benchmark 10-year Treasury note hitting 2%. This is its highest since August 2019.