Fra Handelsbanken:
The higher than expected inflation outcome in combination with the stronger wage data has the potential to add to current budding market fears that Fed will quicken its plan for tightening. At this juncture our expectations are in line with the Fed’s median forecast of three rate hikes this year but the risk of higher inflation prompted by today’s data underpins the possibility that we will see more hikes from the Fed – given that market turmoil does not go out of hand.
In our latest Global Macro Update we specifically highlighted the risk of higher inflation and the CPI data does to some extent validate this view even though one month’s figure should not be over interpreted (also meaning that any initial strong reaction to the figure might abate somewhat). However, we do see a potential for the trend towards firmer inflation to continue.
In the next couple of months will see a roll off of the plunge in cell phone prices in March last year which should add some couple of tenths to the annual growth rate in core CPI. On top of this a tightening labour market, a weak USD and a fiscally induced stronger growth should also add tailwinds to inflation. Note that the latest NFIB survey showed a more marked rise in small businesses actual selling prices and worker compensation which should begin to feed into underlying pressures over the coming year.
