March 24, 2018

Stock market shrugs off CPI rise but inflation obsession may linger

15 February 2018, 04:41 | Melvin Schneider

India’s retail inflation in January slowed to 5.07% as food inflation softened

India’s retail inflation in January slowed to 5.07% as food inflation softened

Michael Feroli, chief USA economist at JPMorgan Chase, said the new data cement the likelihood of a policy move when the Federal Open Market Committee gathers next month and increase the chances that officials will forecast four interest-rate hikes this year, up from three.

The fairly strong inflation report is likely to put more pressure on financial markets in the U.S. and beyond.

The U.S. government publishes several inflation measures on a monthly and quarterly basis.

Elsewhere, the dollar index, a gauge of the buck against a basket of peers, was down 0.5 per cent to 89.33. Stocks on Wall Street opened lower before erasing losses. On top of that, the Fed typically responds to higher inflation by hiking interest rates, ending the easy money days that have fueled a nine-year stock market boom. That would slow economic growth and hit stock valuations that are considered sky-high and bound to slump by many analysts.

Chris Williamson, chief business economist at IHS Markit (Stuttgart: A1139A - news), said a May rate rise was "by no means a done deal" and the Bank would want to see "the economy's health improve to be sufficiently reassured that the economy is ready for another rise in borrowing costs".

Overall consumer prices rose 0.5 percent in January, the most in four months, the Labor Department said Wednesday.

The market's positive reaction to today's stronger-than-expected CPI could be due to the fact that the spike wasn't massive, and also came on a day when January retail sales came in weaker than expected, said Mike Loewengart, VP of investment strategy at E-Trade.

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The "All Items Less Farm Produce" or Core sub-index, which excludes the prices of volatile agricultural goods, stood at 12.10 per cent points during the month of January 2018, similar to rate recorded in December 2017. The year-over-year rate on core inflation at 1.8 percent was still below the Fed's target of 2 percent, he said. The Commerce Department said retail sales fell by 0.3 percent in January compared to economist estimates for a 0.2 percent uptick in sales.

"While we have been looking for inflation to firm, we think last month's increase probably overstates the underlying trend", Michael Feroli, an economist at JPMorgan Chase, wrote in a note to clients. The Fed tracks a different index, the personal consumption expenditures price index excluding food and energy, which has consistently undershot the central bank's 2 percent target since mid-2012.

"The data raise the already high likelihood that the Fed will be lifting rates again next month, unless turmoil in the financial markets increases significantly", said Jim O'Sullivan, chief USA economist at High Frequency Economics. Core inflation is now running at a three-month annualized average of 2.88 percent, the highest since 2008.

Bond yields jumped to 2.9 percent after the hot inflation report, triggering negative opening for the stock market. Price pressures are also seen being fanned by the Trump administration's package of tax cuts and increased government spending on infrastructure.

Rising inflation could hurt consumer spending, which is already showing signs of slowing.

Other analysts noted that the slowdown in January was almost inevitable, following one of the most robust holiday sales periods in years, while even an increasing number of influenza cases and harsh winter weather could have caused retail sales to decline. Consumers reining in at a time of increasing inflation is not a good recipe.

Inflation last month was driven by gasoline prices, which rebounded 5.7 percent after falling 0.8 percent in December.

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