Posted by on February 15, 2017 3:35 pm
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Categories: Atlanta Fed Business Communist Party of India Consumer price index Core CPI CPI Economy Federal funds rate Federal Open Market Committee Federal Reserve System Inflation Macroeconomics March FOMC money Nominal rigidity Price indices United States Consumer Price Index

For those who said a March rate hike looks increasingly likely after today’s blistering CPI report, which saw inflation printing at the highest in nearly 5 years, you are not alone: moments ago Goldman’s chief economist agreed that the “firm CPI may bring forward next rate increase”, and said “as a result, we have revised up our subjective odds of a rate increase at the March FOMC meeting to 30% (from 20%), and now see it as a close call whether the committee raises rates over the next two meetings or waits until mid-year”

Core CPI inflation was well above consensus expectations at +0.31% in January, accelerating to +2.3% on a year-over-year basis. We estimate that the CPI and PPI reports imply an increase of +0.33% (mom) in core PCE inflation, or 1.8% from a year earlier, to be reported on March 1st. As a result, we have revised up our subjective odds of a rate increase at the March FOMC meeting to 30% (from 20%), and now see it as a close call whether the committee raises rates over the next two meetings or waits until mid-year (more details below). Separately, retail sales increased by more than expected in January and earlier months were revised up. 

Based on today’s stronger-than-expected data–especially the CPI report’s likely implications for January core PCE inflation–we are revising up our subjective probability that the next move in the federal funds rate will be a hike at the March FOMC meeting to 30% from 20% previously. We are holding our probability for a hike at the May meeting unchanged at 20%, and lowering our probability that the next hike will come at the June meeting to 40% from 45%. In short, we now think it is a close call whether the committee will hike the funds rate at the next two meetings or wait until June, and we see very high odds (90%) of at least one rate increase by mid-year.

Meanwhile, the Atlanta Fed’s sticky-price consumer price index (CPI)—a weighted basket of items that change price relatively slowly—rose 3.4% (annualized) in January, following a 2.8% increase in December. The 12-month percent change in the index remained at 2.6 percent. At this rate, sticky SPI will soon hit the highest level since the financial crisis.

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