Very Troubling Inflation Report Piles Pressure On Fed

US consumer prices rose more than expected in January, closely-watched data out Thursday showed.

Headline CPI printed a scorching 7.5% (figure below). Consensus was looking for 7.3% from the YoY number.

The core gauge rose 6% on a 12-month basis, also more than anticipated and triple the Fed’s target.

It goes without saying that these are uncomfortably hot figures. It’s notable that forecasters still can’t seem to catch up, despite their own incessant warnings about the likelihood of things “getting worse before they get better.” Both YoY prints were the highest since 1982.

The breakdown wasn’t encouraging. Energy prices rose again, led by a 4.2% monthly increase in the electricity gauge, the second-largest in US history (figure on the left, below).

The 0.9% MoM rise in the broad energy index was the same as December’s increase. Although figures from the last two months aren’t as daunting as the monthly prints seen in 2021, the persistence of higher prices (figure on the right, above) undermines already tenuous claims from the White House that efforts to bring down prices are succeeding.

The gasoline index did tick lower, but it scarcely matters — Americans are paying up at the pump, and that’s obviously weighing on Joe Biden’s approval ratings.

Food prices rose again, and at the swiftest pace since October (figure below). The monthly increase on the food at home gauge was the largest since September.

Five of the six major grocery store food group indexes increased last month. In the 12 months through January, all six rose. Prices for meats, poultry, fish and eggs jumped more than 12% over the year.

Perhaps most troubling, the core gauge rose 0.6% MoM, unchanged from December’s monthly gain. The rise in shelter inflation continued unabated, in keeping with the lagged effect from the property boom (figure below).

Some of that, you’re reminded, is attributable to the Fed’s MBS purchases, although obviously, the housing market is distorted by myriad pandemic dynamics not related to monetary policy.

“Only a few indexes decreased in January,” the BLS said, flatly. The cost of medical care, hospital services, prescription drugs, recreation, apparel, personal care, airlines fares and education all rose.

It was difficult to be generous with this report. “Inflation is at a new 40-year high and it isn’t just the rate that should be worrying the Fed, but also the breadth of corporate pricing power,” ING’s James Knightley said. “With wages, commodity prices and supply chain strains all contributing, the Fed will need to respond aggressively with a very real prospect that they choose to signal their resolve with a 50bps March move.”

“An upside inflation surprise would [likely] see an extension of the rates selloff [and] March picking up more 50bps probability,” Nomura’s Charlie McElligott said, prior to the release, noting that equities could come under renewed pressure given the assumed read-through for the Fed.

There was an argument to be made that the headline YoY prints weren’t bad enough to spark any kind of policymaker panic, but I’d reiterate that the across-the-board nature of the price increases was disconcerting.

“In the event that the CPI print is as-expected or modestly higher, this will strengthen the case for a higher terminal policy rate estimate — an influence that will weigh on the five-year sector much more than 10s and 30s,” BMO’s Ian Lyngen and Ben Jeffery remarked, in a note out just before the data crossed.

“A significant upside surprise however, will provide fodder for the 50bps March hike camp,” they added, on the way to noting that although they’re “skeptical the Fed will choose to increase at increments greater than 25bps, the highest yearly pace of CPI since the early 1980s will surely trigger enough headlines to keep the potential for an even more aggressive Fed topical.”