The rampant inflation reported by the U.S. Thursday may lead the Federal Reserve to take a more aggressive stance toward interest-rate hikes than previously expected.
Consumer prices soared 7.5% in the 12 months through January, the highest rate in almost 40 years.
The Fed has indicated it will likely begin raising rates next month. Until Thursday, interest-rate futures traders expected the central bank to begin with a 25-basis point move. But now they see a 99% chance for a 50-basis point move.
And they see a 68% probability for at least 175 basis points of increases this year. That’s the equivalent of seven 25-basis point moves.
“January’s upside CPI surprise adds strongly to the case for a 50-basis point hike at the March FOMC meeting,” Bloomberg economists Anna Wong and Andrew Husby told Bloomberg News.
“The increase was broad-based, with energy, food prices and rents keeping prices elevated, and with some alarming increases in categories not seen before.”
That includes medical services, which has a much larger weight in the personal consumption expenditures price index, the Fed’s preferred price gauge, they noted.
The “burning inflation … confirms … the Fed… is behind the curve,” Diane Swonk, chief economist at Grant Thornton, told CNBC. She now sees a 50-basis point move in March.
“You’re now trying to get a boiling pot down to tepid. That’s a very hard thing to do without dumping a bunch of ice in it.”
Many experts think inflation will remain high.
“A rapid cyclical acceleration in inflation is under way. And with labor market conditions exceptionally tight, it is unlikely to abate any time soon,” Andrew Hunter, senior economist at Capital Economics, told the Wall Street Journal.
That’s a call to action for the Fed, many say. “
It isn’t just the [inflation] rate that should be worrying the Federal Reserve, but also the breadth of corporate pricing power,” James Knightley, chief international economist at ING, told The Journal.
