- The key January US consumer price inflation report will be released today.
- Some blame a recent lift in US wage pressures for recent market volatility, raising concerns that stronger inflationary pressures may see the US Federal Reserve lift interest rates even faster.
- Today’s report carries the potential to either calm those fear or make them a whole lot worse.
Of all the data released this week, none is likely to be as influential as Wednesday’s US inflation report.
With markets, especially stocks, already on tenterhooks about the potential for a sharp lift in inflationary pressures following an acceleration in wage pressures in January’s US non-farm payrolls report, it carries the potential to either calm those fears or make them a whole lot worse.
Ahead of this potential blockbuster event, Deutsche Bank’s economics team have been running the ruler over what to expect.
In their opinion, the fears over an acceleration in inflationary pressures may be quelled by the January report, albeit temporarily.
While we remain constructive on the medium-term inflation outlook – we expect core CPI inflation to rise to 2.2% by year-end – we anticipate a slightly softer core inflation print for January of 0.16%, which would lower the year-over-year rate by one-tenth to 1.7%, due to the negative base effect from a strong print in January 2017. A slightly weaker reading than we anticipate could cause the year-over-year rate to round down to 1.6%. Nevertheless, if our forecast is close to the mark, the 6-month annualised growth rate for core CPI would rise further to 2.2%. With the monthly trend expected to pick up in the coming months, the prevailing narrative from the report should be that core inflation is firming, and indeed, it is on track to near the Fed’s target this year.
So they expect a soft core CPI print, seeing the year-on-year rate edge down to 1.7% from 1.8% thanks in part to a high base effect created by a strong core CPI reading in January 2017.
However, even if in line with its expectations, it would still act to push core CPI higher on a six-month annualised basis, helping to cement the view that inflationary pressures are indeed building towards the Fed’s 2% target.
“A print consistent with our forecasts, in contrast, suggests a Fed that is on track to meet the dots, but has no pressing need to accelerate the pace of hikes,” says Deutsche.
“An extremely strong print would be necessary to raise risks that the Fed accelerates rate hikes… [given] a 0.27% monthly result would be necessary to keep the year-on-year number constant [meaning] even a well-above consensus print need not imply a more hawkish Fed.”
Still, given the sensitivity investors showed to the wage figure in January’s US payrolls report, a print above the consensus forecast of 0.2% still carries the potential to set the cat among the pigeons.