Will the Recent Inflation Signal a Rate Hike?

Fed’s Tightening Agenda Remains Vague

Federal Reserve officials reinforced in January’s FOMC meeting that they would start raising rates in March, according to the minutes released on Wednesday. The central bank is open to the idea of a faster interest rate hike but they would still rely on future economic data to determine whether a faster pace of tightening is justified. Receive the latest news update here

“Most participants noted that, if inflation does not move down as they expect, it would be appropriate for the committee to remove policy accommodation at a faster pace than they currently anticipate,” the minutes say.

The Fed is hesitant and less hawkish than expected. Even when the economic data released before the January meeting is encouraging, there is no explicit mention of the exact date to begin the process or the possibility of a 50 basis point hike.

A month after the meeting, both the producer price index and consumer price index results revealed that inflation continues to soar, suggesting a need for steeper tightening. Will the Fed announce the first interest rate rise in the next scheduled meeting?

Inflation Is Getting Higher

According to the data released on Tuesday, the producer price index was up 1% in January, the biggest increase in eight months. The PPI jumped 9.7% over the past 12 months ending in January 2022. The results are much worse than anticipated. The Wall Street forecasted the monthly increase and the 12-month PPI to be 0.5% and 9.1%.

The prices for final demand goods rebounded by 1.3% in January, compared to a 0.1% decline in December. According to the press release, over 40% of the broad-based increase can be traced to a 0.8% rise in the index for final demand goods less foods and energy.

A similar situation happened to retail inflation. Driven by a surge in the cost of shelter, food and energy, the consumer price index climbed 0.6 in January and 7.5% over the past 12 months. The 7.5% increase marked the biggest increase since 1982. Stripping out the price volatility of food and energy costs, the CPI rose 6%, still above the market estimate of 5.9%.

The Fed previously indicated in December 2021 that inflation would fall sharply this year. Considering the current situation, market expects the Fed to act more swiftly and aggressively to tame inflation. Market does not rule out the possibility of the Fed raising hike before the next FOMC meeting.

Upcoming events to watch:

• Feb 17 (Thurs) 8:30 (GMT-5) – Initial Jobless Claims
• Feb 24 (Thurs) 8:30 (GMT-5) – US GDP
• Mar 4 (Fri) 8:30 (GMT-5) – Nonfarm Payrolls
• Mar 4 (Fri) 8:30 (GMT-5) – Unemployment Rate
• Mar 9 (Wed) 8:30 (GMT-5) – JOLTs Job Opening

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.