After consumer prices were reported last Wednesday to have risen the most since February 2013, trader expectations for an interest rate hike at the Federal Reserve’s March meeting jumped to 42 percent before settling back in around 36 percent.
Labor Department figures showed that, following a 0.3 percent gain in December, CPI increased a larger-than-forecast 0.6 percent for the month of January. Higher prices for gasoline led headline inflation higher and owner’s equivalent rent continues to be a major contributor to core inflation. The inflation print accentuates Federal Reserve Chair Janet Yellen’s comments during her semi-annual testimony to the Senate Banking Committee that interest-rate increases will be appropriate if inflation picks up and that waiting too long to tighten policy “would be unwise.”
We will get an update on PCE, the Fed’s preferred gauge of inflation, on February 28th. Inflation isn’t the only metric that is on the rise, as multiple measures of consumer confidence, including small business optimism, are at their highest levels since 2004. Retail sales also showed a broad advance during the month of January. Retail sales excluding automobiles rose 0.8% versus expectations of 0.1%, and the December number was revised higher to 1%, indicating that the consumer is well positioned to continue spending into the new year.
Though a rate increase in March is far from guaranteed, acceleration in the inflation picture along with the continued strength of the consumer have moved the market closer to the Fed and put the option for a hike on the table.