U.S. financial markets have been on edge after being spooked by a surge in annual wage growth in January.

Inflation Building Up

So-called base effects will turn more favorable in March, which economists say would set the course for higher annual inflation readings. Average hourly earnings jumped 2.9 percent on an annual basis in January, the largest rise since June 2009, from 2.7 percent in December.

A pickup in wage growth as the labor market hits full employment is expected to contribute to higher inflation this year. Fiscal stimulus in the form of a $1.5 trillion tax cut package and increased government spending are also expected to add to price pressures.

"The Fed's task is complicated by the recent tax cuts and spending deal, which will stimulate the economy at a time when the labor market is already at, or close to, full employment," said Gus Faucher, chief economist at PNC Financial in Pittsburgh.

A weakening dollar is also expected to put pressure on inflation. Rising inflation could hurt consumer spending, which is already showing signs of slowing. A separate report from the Commerce Department on Wednesday showed retail sales fell 0.3 percent in January, the largest decline since February 2017, after being unchanged in December.

"Bad January weather could have contributed to the weakness in retail sales as consumers avoided auto dealerships and put home building projects on hold," said Scott Anderson, chief economist at Bank of the West in San Francisco.

The weak retail sales and stronger inflation prompted the Atlanta Fed to slash its first-quarter gross domestic product growth estimate by 0.8 percentage point to a 3.2 percent annualized rate. The economy grew at a 2.6 percent pace in the fourth quarter.

Inflation last month was driven by gasoline prices, which rebounded 5.7 percent after falling 0.8 percent in December. Crude oil prices surged in January on strong global demand and a depreciating dollar. Food prices rose 0.2 percent in January.

The core CPI was boosted by rising rents. Owners' equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, increased 0.3 percent after a similar gain in December.