- Chris Rupkey, chief economist at MUFG Union Bank in New York
US underlying inflation surged to the highest level in more than four years in January, led by increasing rents and medical costs, a sign that price pressures started to build that could allow the Fed to gradually hike interest rates this year. According to the Labor Department, the consumer price index, excluding the volatile food and energy components, increased 0.3% last month. That was the biggest surge since August 2011 and followed a 0.2% rise in December. In the 12 months through January, the core CPI jumped 2.2%, the largest rise since June 2012 and exceeded the 1.9% average annualized increase over the last 10 years. The overall CPI was unchanged last month after slipping 0.1% in December. The CPI increased 1.4% in the 12 months through January, the biggest rise since October 2014, after gaining 0.7% in December.
The Fed hopes to see more widespread price increases taking hold this year, so that central bankers can deliver their promise to gradually hike short-term interest rates. Recent economic and international developments have raised doubts among analysts and even within the US central bank whether rate hikes are still the right decision. Tighter financial market conditions in the wake of a recent sharp stock market sell-off and weakening domestic and global growth have wiped out bets for a March rate increase. The probabilities of rate hikes for the rest of the year are slim.
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