Inflation ran at a 2.1 percent annual rate in January, the Bureau of Labor Statistics said in a highly-anticipated report on Wednesday that immediately spooked investors.
Forecasters had expected annual inflation to slow from 2.1 percent to 2 percent in the Bureau’s Consumer Price Index. Instead, the monthly numbers came in stronger than anticipated, driven partly by the biggest price increases for clothing in nearly three decades.
Yields on Treasury securities immediately spiked and stock futures plunged on the news.
Investors were watching the report closely for signs that inflation is finally picking up fast enough to warrant a strong response from the Federal Reserve. The possibility that the central bank could react to faster rising wages and prices is one of the factors that analysts say has upset markets in recent weeks.
“Core” inflation is running even hotter than headline inflation, suggesting that there is an underlying trend toward faster-rising prices. Core inflation, which sets aside food and energy prices, rose 0.3 percent on the month, the biggest month-to-month change since last January. That increase was big enough to keep annual core inflation steady at 1.8 percent. Central bankers and investors watch core inflation because it’s less volatile than the overall index.
Inflation has mostly run below the Fed’s 2 percent target (which it gauges against a different index) for around five years, during which time the central bank has only moved slowly to reverse its crisis-era stimulus measures and raise its interest target. But faster-rising inflation could prompt the Fed to tighten monetary policy more quickly, a prospect that has traders on edge.
“The Fed’s job now is to prevent the economy from overheating, which could lead to an acceleration in inflation to consistently above the 2 percent goal,” said Gus Faucher, chief economist for PNC.
Inflation has still been running below the Fed’s target in recent months, based on the index it uses. But the bulk of Fed officials believe that mounting job gains and signs of growing wages mean that inflation is bound to rise, and that they should slowly raise interest rates before inflation hits their target to make sure it doesn’t get out of control.
