U.S. Jan inflation beats forecasts, records biggest increase in nearly four years

U.S. consumer prices spiked in January to record their largest gain in nearly four years mostly reflecting a rebound in the cost of gasoline and other goods. The Labor Department said on Wednesday its Consumer Price Index jumped 0.6 percent in January month after gaining 0.3 percent in December. Data was above economists' expectations for 0.3 percent increase.

In the 12 months through January, the CPI increased 2.5 percent, the biggest year-on-year gain since March 2012. The annual rise in January compared to a 2.1 percent in the year to December. Core CPI rose 0.3 percent in January after increasing 0.2 percent in the previous month. Year-on-year core CPI increased to 2.3 percent from December's 2.2 percent increase.

For years low inflation had kept the Fed from raising historically low interest rates. Today's data suggested that inflation pressures could be picking up. Gradually firming inflation and a tightening labor market could allow the Fed to raise interest rates at least twice this year. Fed Chair Janet Yellen also told lawmakers on Tuesday that "waiting too long to remove accommodation would be unwise."

US 10yr treasury yields rose from 2.47 percent to 2.52 percent and 2yr yields rose from 1.23 percent to 1.26 percent in response to stronger than expected CPI and retail sales data. Fed fund futures firmed 2bp-4bp. The April contract is now trading at 0.73 percent (which is 10.5bp above the current midpoint FFR of 0.625 percent, which implies around a 40 percent chance of a rate hike in March).

"Following the January CPI release, we have left our February core CPI unchanged at 0.2% m/m and 2.2% y/y. For the January PCE report, we expect headline PCE to have increased 0.5% m/m and 2.0% y/y. For core PCE, we expect a 0.3% m/m and 1.8% y/y rise." said Barclays Capital in a report.