According to Rob Carnell, Chief International Economist at ING, today’s US inflation, and retail sales data, strengthens the case for a March rate hike from the Federal Reserve.
“US inflation rose substantially more than expected in January, helped by a 4.0%MoM rise in energy prices. Headline inflation is now 2.5%YoY. But what is perhaps more eye-catching, is that core inflation defied expectations for a slight pull back, and drove up to 2.3%YoY.”
“Whilst headline inflation gains can be put down to the impact of helpful base effects, the rise in the core rate, coupled with a better trend in wages growth, sends a clear message that the US economy is now running a little hot, the labour market is tight, and the time for inaction and caution from the Fed is over.”
“The conclusion we reach from the inflation data is supported also by activity data – in the form of a further strong retail sales figure. Advance retail sales rose 0.4%MoM in Jan, building on a 1.0%MoM gain in December, with core sales also putting in a strong showing.”
“The probability of a March Fed hike implied from the Fed funds curve is 42%. We don’t need much more of a push for a March hike to become the market base case.”