U.S. headline inflation accelerates sequentially in January, Fed likely to hike rates in March

U.S. headline inflation accelerated in the month of January. The consumer price index rose 0.5 percent on a sequential basis, leaving the year-on-year rate stable at 2.1 percent. The acceleration in inflation was driven by higher energy prices that rose 3 percent sequentially. A rise in the gasoline index countered falls in other energy components. Prices for food were up 0.2 percent sequentially.

Meanwhile, the core rate came in at 0.3 percent sequentially. The indices also rose for shelter, apparel, medical care, motor vehicle insurance, personal care and used cars and trucks. On the other hand, the indices for airline fares and new vehicles declined over the month.

In spite of the hearty monthly gain, unfavorable base effects kept the year-on-year rate of core inflation at 1.8 percent, the same as in December. However, core inflation has lingered in the range of 1.7 percent to 1.8 percent for nine straight months.

The report released today should give more confidence that inflation pressures are rising in the U.S. economy. Core inflation might be below 2 percent for now, but that in part is because of comparisons to hot inflation readings at the start of 2017, stated TD Economics in a research report. Even moderate rises in core inflation in the next few months will see it above two percent.

While there were some huge rises in categories such as apparel, more persistent categories of services inflation are beginning to show upward momentum. This provides larger confidence that inflation pressures are expected to be sustained.

“Today's report increases our confidence that the Fed will raise rates in March”, added TD Economics.

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