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.