UNITED STATES — The January CPI report indicated consumer prices rose a stronger than expected 0.5 percent in the month. This report will likely abet financial market concerns about rising inflation pressures that emerged last week with wage inflation rising at a pace not seen since 2009. Indications of incipient wage pressures reinforced the view that labor markets are operating beyond capacity with a current unemployment rate of 4.1 percent.
Confirmation of tightening labor markets made an even stronger case for the Fed to continue to tighten policy which weighed on financial markets. Today’s inflation report will raise concerns that this wage pressure is starting to seep into consumer prices. It is the case that the year-over-year rate for core prices remained unchanged at 1.8 percent and thus below the Fed’s inflation objective of 2 percent.
However, the six-month average price gain for core consumer prices has jumped to 2.6 percent from 2.2 percent in December. This pressure in conjunction with indications of potential wage pressures emerging are expected to keep the Fed tightening.
“Our forecast assumes that the central bank will raise the fed funds range by 25 basis points at the March FOMC meeting to 1.50 percent to 1.75 percent. The tightening is expected to continue through the forecast with similar-sized hikes expected each quarter through the end of 2019 resulting in the fed funds range finishing next year at 3.25 percent to 3.50 percent,” reports Paul Ferley, assistant chief economist at RBC.
For more economic research, visit the RBC website at http://www.rbc.com/economics.
SOURCE: The Economics Department of RBC Financial Group press release