Inflation Targets Above Expectations, Spooking Markets

Inflation Targets Above Expectations, Spooking Markets

Troy Powers
February 14, 2018

The Consumer Price Index increased 0.5 percent in January, with households paying more for gasoline and rent, compared with a 0.2 percent rise in December, data showed. That would match the fastest pace since February 2017.

The rate had hit 3.1 percent in November, which was the highest level in nearly six years. "These trends support our view that a part of the spike in manufacturing growth in November 2017 was a catch-up because of the muted volumes in the earlier months of the fiscal, which would ebb away", said Aditi Nayar, Principal Economist, ICRA. "The tension comes from the average hourly earnings, and to some extent policy announcements".

With all the current available data, some commentators think that the BoE could purse an even more aggressive course of action.

One of the main reasons, all eyes are on BoE governor Mark Carney to make a move is because of inflation's stranglehold on United Kingdom households.

Prices of new motor vehicles slipped last month and the costs of recreation, communication and alcohol were unchanged.

He also added that if the prices come in at 1.9 or 2% above, that is going to trigger a whole new episode of volatility all of witnessed in the last week.

Certain sectors that saw a robust pickup in December may settle back in January, including medical goods and cars, according to Bloomberg Economics.

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A separate report showed US retail sales unexpectedly fell in January and December figures were revised downward, suggesting consumer spending is on a slower track in the first quarter.

Higher inflation is indeed coming, but at the moment market participants may be exaggerating both its timing and magnitude.

The Labor Department says overall consumer prices rose 0.5 percent in January, the most in four months. The rate of price change for the most important item in the core CPI basket, shelter, was actually slightly lower in January than December.

Independent economists attributed the high growth in two consecutive months to a low base when industrial output had collapsed due to the impact of demonetisation in late 2016.

This prompted markets to price in as much as a 70 percent chance of a quarter-point rise in interest rates by May, and a roughly 50 percent chance of a further increase in rates to one percent by the end of the year - a level last seen in 2009. Dow Jones, S&P 500, NASDAQ, Gold, Silver and Crude Oil futures were down before trading kicked off.

The single biggest contributor to the unexpectedly high increase in the Core CPI (0.3% vs.an expected 0.2%) was a big jump in the price of apparel. But readings in line with estimates won't necessarily be cause for calm.