US inflation strengthened at the end of last year, lifting expectations that the Federal Reserve will raise rates as soon as March as rapid growth and low unemployment promise to boost prices.
US inflation strengthened at the end of last year, lifting expectations that the Federal Reserve will raise rates as soon as March as rapid growth and low unemployment promise to boost prices.
Core US consumer prices climbed at their quickest pace in nearly a year, increasing 0.3 per cent in December against the previous month, according to the Labor Department. Prices excluding food and energy were up 1.8 per cent from a year earlier, compared with 1.7 per cent the previous month.
Fed officials have pencilled in three rate increases this year, but several analysts see the prospect of four rises given the strength of the economy and the added short-term impetus from deficit-expanding tax cuts. Bill Dudley, the New York Fed president, said in a hawkish speech on Thursday that the Fed needed to take on board the risk of economic “overheating” as it sets policy.
He indicated that if the central bank’s Federal Open Market Committee is slow in tightening policy, it could be forced to hit the brakes, risking a recession. The increase in core inflation topped expectations for a 0.2 per cent rise. A separate release from the Commerce Department revealed retail sales rose in December following an upwardly revised gain in November.
Following the data, the yield on the policy-sensitive two-year Treasury climbed above 2 per cent for the first time since the financial crisis, while the benchmark 10-year yield rose 5.6 basis points at 2.58 per cent. Meanwhile, the US dollar index trimmed its losses immediately after the data to trade 0.46 per cent lower at 91.43.
Michael Gapen, US economist at Barclays, said: “We view the report, on balance, as helping to confirm FOMC members’ suspicions that disinflation from 2017 will likely prove transitory. Alongside a forecast of above-trend growth and a declining unemployment rate, today’s inflation data are consistent with our outlook for further normalisation of Fed policy. We expect four 25 basis-point rate increases in 2018 with the next hike coming at the March FOMC meeting.”
Fed policymakers have been divided over how to read price data as inflation continues to undershoot the central bank’s 2 per cent target. But with above-trend growth forecast for this year on top of 2017, and unemployment heading below 4 per cent, officials have stuck with their belief that price growth will pick up.
Adding to the impetus for higher rates are effervescent financial markets. Surging asset values have left financial conditions no tighter than they were when the Fed started its rate-raising campaign in late 2015.
“For now, this report adds more weight to the idea that the run of soft numbers from March through July was ‘transitory’,” said Ian Shepherdson, economist at Pantheon Macroeconomics.
The separate retail report showed US headline retail sales were in line with estimates, climbing 0.4 per cent in December from the previous month when they had jumped 0.9 per cent. So-called control retail sales rose 0.3 per cent month-on-month.
The data showed a decline in sales of clothing and accessories, sporting goods, and a 1.1 per cent drop at department stores. However, sales at furniture and home furnishing stores and online sales climbed.
