A hotter-than-expected U.S. inflation print would push the Federal Reserve closer to considering its single-largest rate hike in more than two decades.
The January consumer price index, due Thursday, is one of the most important data releases before the central bank’s March meeting, which Chair Jerome Powell has signaled will kick off a series of interest-rate hikes.
A reading above the projected 7.2% annual advance in prices—which would be the largest since 1982—may pressure the Fed to consider its first half-percentage-point increase since 2000, instead of a typical quarter-point move.
Powell indicated last month he wouldn’t rule out a half-point hike, and after an unexpectedly strong January jobs report in which payrolls beat all estimates and wages jumped, traders are all the more convinced that the Fed will be aggressive. Based on Fed funds futures, they now see a one-in-three chance of a 50-basis-point hike, up from one-in-five before the employment data.
“Because the Fed hasn’t taken it off the table, or said it’s extremely unlikely, the market is going to run with it,” said Aneta Markowska, chief financial economist at Jefferies LLC. Given today’s strong labor market, “the Fed’s reaction function relies on one variable and that is inflation. These numbers are going to matter, big time.”
Even so, it’s a risky move for Powell, who’s awaiting confirmation to another four-year term at the helm. Critics say the Fed has been too slow to act and is now behind the curve in tackling inflation, and a half-point move could be perceived as an admission that they’re right.
And for President Joe Biden—whose party risks losing a razor-thin congressional majority in this year’s midterm elections—it’s all the more important that Powell gets it right. Biden’s approval ratings have fallen in recent months and many point to his administration’s stimulus package for supercharging prices.
Excluding the volatile food and energy categories, core prices likely rose 5.9% in January from a year earlier, also the fastest in nearly four decades, according to the median forecast in a Bloomberg survey of economists. Still, there’s a lot of ways the numbers could shake out: estimates range widely from a monthly advance of 0.2% to 0.8% in the core.
Airfares and lodging away from home are two of the day’s biggest wild cards, as omicron and the related jump in Covid-19 infections curbed travel. Meantime, the two largest components of shelter—rent of primary residence and owners’ equivalent rent—are projected to post another solid advance in January, a theme that’s expected to continue over the coming months.
“We expect most of the softness to be concentrated in Covid-sensitive service prices,” said Robert Dent, senior U.S. economist at Nomura, which is predicting the Fed will hike 50 basis points. “Considering those components will likely rebound strongly as omicron fades, we believe the Fed will look through those price declines.”
The January CPI figures will also reflect an update to the relative importance of certain categories in the consumer basket. The weights, which were released Tuesday and are based on spending habits in 2019 and 2020, include changes like a bigger weighting for used cars and trucks and a smaller one for food away from home—a reflection of how the pandemic changed consumption patterns in the U.S.