US data surprises boost rate hike prospects - ING

James Knightley, Chief International Economist at ING offers his views on today's mixed US economic data, which provide quite a few surprises. Headline CPI held steady at 2.1% and so did the core CPI at 1.8%, while retail sales were far softer than expected and fell 0.3%MoM.

Key quotes:

“We think the softness in retail sales is temporary. With tax cuts, record low unemployment, rising wages and high confidence levels suggesting the outlook for spending remains good. However, we think there could be more bad news for inflation. The dollar’s declines will gradually push up import prices, while energy costs will add to the upside. Then there are last year’s distortions relating to cell phone data plans dropping out of the annual comparisons from March. This on its own will add 0.2/0.3 percentage points to annual core inflation with medical care costs and housing costs pushing inflation higher too.”

“In an environment of strong consumer demand, corporates have the pricing power to pass on higher costs to customers, which is going to be increasingly significant given the prospect of a pick-up in wage growth. Taking this all together, we expect core inflation to be back above the Federal Reserve’s 2% target in March with headline inflation hitting 3% by the summer. In turn, this healthy growth, rising inflation environment means that we consider there to be upside risk for our call of three Fed rate hikes in 2018.”