Mounting inflationary pressures in the U.S. economy triggered continued concerns Wednesday that U.S. Federal Reserve may act sooner rather than later by hiking interest rates to cool growth and temper price pressures.
According to figures released by the Department of Labour early Wednesday, U.S. consumer prices jumped by 0.5 per cent last month, far ahead of the 0.3-per-cent most economists had been forecasting.
The March increase also came on the heels of a 0.3-per-cent rise the month before and marked the biggest one-month increase since late 2001.
Coupled with a Tuesday report showing a 1.7-per-cent increase in retail sales for the same month, the latest consumer price index left the markets speculating that summer rate hike is now more likely.
A separate economic report Wednesday also showed the U.S. trade gap narrowed in February as imports and exports rose to record levels.
In the wake of the inflation report, Fed funds futures sold off Wednesday, now pricing in a 100 per cent chance of a quarter percentage point rate hike in August. Futures were also pricing a 50 per cent chance of a move in June.
“The data send a strong message that disinflationary pressures have bottomed out in the U.S. economy and solidify the case for the Fed to begin rebalancing monetary policy this August,” Toronto-Dominion Bank economist Gillian Manning said.
On a year-over-year basis, headline inflation was up 1.7 per cent, matching February's increase. However, core inflation rose 1.6 per cent, up from the 1.2-per-cent rate posted the month before.
“This marks the largest monthly increase in the 12-month core inflation rate since 1990,” Royal Bank of Canada economist Ivana Rupcic noted.
The increased inflationary pressures, she said, will also likely mean that the Fed will have to revisit its assessment of inflation risks when it meets next month, lifting it to neutral from the current threat of a slight disinflationary bias.
“Depending on how the economic data plays out between now and the May 4th meeting, the Fed might also have to reevaluate for how much longer it can be patient before removing its policy accommodation,” she said.
According to Wednesday's Department of Labour report, core inflation — which strips out the index's most volatile components — rose 0.3 per cent in March.
In terms of the overall inflation picture, higher energy prices drove much of the March increase, climbing 1.9 per cent after a 1.7-per-cent increase a month earlier.
The higher energy prices were in turn lifted by a 5.5 per cent increase in gasoline prices.
However, despite the upward lift from the energy sector, price pressures were also evident elsewhere.
Food prices rose 0.2 per cent in March. Costs to consumers for airline travel rose 1.1 per cent. Clothing prices were up 0.9 per cent month over month.] Meanwhile, the U.S. Commerce Department reported that the February trade deficit narrowed to $42.1-billion, down about 3 per cent from January's levels.
U.S. exports were up 4 per cent to a record $92.4-billion. Imports rose 1.6 per cent to a record $134.5-billion.
