No More Waiting: Inflation May Have Already Hit Fed's Target

  • Economists boost estimates for preferred gauge after CPI data
  • Core inflation still seen taking longer to reach 2 percent

U.S. Consumer Prices Jump Most in Nearly Four Years

Forget wondering when U.S. inflation will reach the Federal Reserve’s goal. It may be there already.

The biggest monthly jump in almost four years in the Labor Department’s consumer-price index led some analysts to raise their estimates Wednesday for the Fed’s preferred inflation gauge, the Commerce Department’s personal consumption expenditures price index. 

Morgan Stanley’s Ted Wieseman and Michelle Girard of NatWest Markets both said that the PCE measure probably rose 2 percent in January from a year earlier, up from previous projections of 1.8 percent. Economists at Goldman Sachs gave an estimate of 1.98 percent.

If confirmed in data due March 1, it would mark the first time since April 2012 that the index has hit the central bank’s 2 percent goal, after modest global growth and lower oil prices held down inflation for much of the past five years. With the CPI picking up more than anticipated and retail sales exceeding projections in January, traders on Wednesday boosted bets that the Fed will raise interest rates at its next meeting in mid-March.

The “surprisingly strong report that should carry over into even more upside in PCE inflation,” Wieseman, a New York-based economist, wrote in a note. The PCE price index rose 1.6 percent in December from a year earlier.

The consumer-price index advanced 0.6 percent in January from the previous month, compared with analysts’ median estimate of 0.3 percent, the Labor Department’s figures showed Wednesday. In a sign of resilient demand among consumers, retail sales climbed 0.4 percent, Commerce Department data showed.

Following the CPI data, Wieseman and Girard both estimated the PCE price gauge increased about 0.5 percent in January from the prior month, which would indicate a 2 percent increase from a year earlier.

“That’s a lot higher than we expected, which will be a big hit to real consumption versus the strong underlying nominal retail sales results,” Wieseman wrote.

Rising demand and a recovery in commodity prices have given a boost to inflation in recent months. The CPI gain was led by higher gasoline costs as well as broad-based price increases spanning clothing and new cars, and followed data on Tuesday showing price pressures are also accelerating in the production pipeline.

Since the headline PCE gauge includes volatile food and energy costs, the Fed strips those out to get a better read on underlying inflation. The so-called core gauge probably rose 1.8 percent in January from a year earlier, Wieseman estimates. It also last hit 2 percent in April 2012.

Fed policy makers, in their most recent round of economic forecasts in December, indicated they weren’t quite confident of hitting their inflation target this year: PCE prices were seen rising 1.9 percent in the fourth quarter of 2017 from a year earlier, and core prices were forecast to gain 1.8 percent.

The median estimates in a Bloomberg survey of economists earlier this month were for PCE prices to rise 1.9 percent in the first quarter of 2017 from a year earlier, and for the core PCE gauge to increase 1.7 percent.

Before it's here, it's on the Bloomberg Terminal.