Rise in US inflation puts spotlight on Fed’s Powell

WASHINGTON: US consumer prices rose more than expected in January as Americans paid more for gasoline, rental accommodation and healthcare, raising pressure on new Federal Reserve chief Jerome Powell to prevent a possible overheating of the economy.
The report from the Labour Department on Wednesday, however, likely overstates the inflation picture given that some of the price gains, especially for apparel and motor vehicle insurance, are seen by economists as unsustainable.
Inflation, which could get a further boost from a tightening labour market and increased government spending, might force the Fed to be more aggressive in raising interest rates this year than currently anticipated. That would slow economic growth.
The US central bank has forecast three rate hikes for this year, with the first increase expected at its next policy meeting in March. Powell took over the reins of the Fed from Janet Yellen earlier this month.
“While we have been looking for inflation to firm, we think last month’s increase probably overstates the underlying trend,” said Michael Feroli, an economist at JPMorgan in New York.
“Today’s inflation reading should probably cement in place the Fed’s intent to hike rates at the March meeting. We now also think the odds are moving up that they also revise their guidance at that meeting from looking for three hikes this year to four, aligning with our view.”
The Labour Department said its Consumer Price Index increased 0.5 per cent last month as households paid more for gasoline, rental accommodation and healthcare. The CPI rose 0.2 per cent in December. The year-on-year increase in the CPI was unchanged at 2.1 per cent in January as the large price gains from last year dropped out of the calculation.
Excluding the volatile food and energy components, the CPI shot up 0.3 per cent. That was the largest increase since January 2017 and followed a 0.2 per cent rise in December. The year-on-year rise in the so-called core CPI was unchanged at 1.8 per cent in January. Economists had forecast the CPI increasing 0.3 per cent in January and the core CPI rising 0.2 per cent.
The core CPI is viewed as a better measure of underlying inflation trends. 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 per cent target since mid-2012. — Reuters