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US inflation report fuels rate hike worries


On February 14, the US Consumer Price Index (CPI) report for January came out mostly as expected, with prices up 0.5% month-over-month or 6.4% on a yearly basis. This was largely due to an increase in energy costs (+8.7% year-over-year) and food prices (+10.1% year-over-year).

Core CPI, which excludes food and energy prices, was up 0.4% month-over-month. This was a 5.6% increase on an annual basis, down from September’s high of 6.6%. The shelter component was up nearly 8% year-over-year and accounted for nearly 60% of the total increase in core inflation. The Trimmed Mean CPI, which excludes CPI components with the most extreme monthly price changes, increased at 7% (annualized rate). This suggests that inflation is still broadly too high.

Looking at just core service inflation, excluding housing and energy services, this index was up 0.24% month-over-month, and the yearly rate eased to 6.1% from 6.4%. The 3-month annualized rate for this measure was 3.7%, which is down dramatically from the peak of 9.1% reach last June.

While the trend for inflation may have turned, the US still has an inflation problem. The economy and labour market are still operating above capacity. For inflation to consistently be at the 2% target rate, the economy will need to move from a state of excess demand to a state of shortfall.

Key Takeaway:

US inflation is slowly heading lower, but core price inflation remains elevated. This, combined with strong January payroll data, will keep the US Federal Reserve biased towards raising rates. This has relevance here at home, since changes in the federal funds rate affect long-term interest rates in both the US and Canada. The dilemma for the Fed is how tight a stance to take with monetary policy – and for how long – to achieve the desired rebalancing of the economy.

Independent Opinion

The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.


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