Onwards and upwards, unfortunately

There's not much that need be said about the US January CPI data released this morning by the BLS.  Headline CPI rose 0.6 percent in the month, higher than market expectations, bringing the year on year increase to 7.5 percent, its highest level since February 1982. The energy sub-index rose 27 percent from a year ago; excluding food and energy prices from the calculation gives a core CPI increase of 6.0 percent, the highest since August 1982. 

There is no relief in sight in the short term. Global energy prices continue to rise, against a background of economic recovery and simmering geopolitical tensions. Unless the February month-on-month increase falls below the 0.4 percent seen in February 2021, year-on-year headline CPI will hit a fresh multi-decade high. It is only towards mid-year that this "base effect" might start to exert a moderating influence on the yearly figure, as last year's outsize monthly gains start to fall out of the calculation. 

Not surprisingly, the data have renewed speculation about the pace of Fed tightening, as well as reviving debate over why the Fed did not make its first move at the January FOMC session. There is talk of a 50 basis point initial move in March, as well as suggestions that rate hikes totalling 200 bp might be needed by year-end. The upward pressure on market rates is pushing the 10-year Treasury yield ever closer to 2 percent and moving mortgage rates rapidly higher. 

It is quite possible that the underlying causes of this inflationary spike mean that rate hikes will be relatively powerless to stop it, unless the Fed is willing to bring the economy to a screeching halt. Even if that is the case, the Fed cannot really afford to delay much further: another couple of months of four-decade highs in inflation will severely damage the prospect of keeping inflation expectations under control.  If a 50 bp hike in March sent a strong signal to markets and consumers alike, it might actually reduce the scale of the overall tightening needed to get CPI back to more acceptable levels. There will certainly be voices in the FOMC calling for such a move.