US January CPI comes in ahead of forecasts

The cost of living in the US was steady last month, contrary to expectations for a dip, buoyed by unusually large increases in clothing and medical care prices, with those for the former rising at their quickest pace since 1990.

Consumer prices edged past economists' forecasts, despite much ballyhooed revisions to the government's seasonal adjustment factors which, in fact, were expected to contribute to a small decline in the rate of advance.

The rate of gains in headline consumer prices was at 2.1% year-on-year in January, according to the Bureau of Labor Statistics (consensus: 2.0%), unchanged from the month before, while at the 'core' level CPI came in at 1.8% (consensus: 1.7%), which was also the same as in the month before.

As of 1338 GMT, the yield on the benchmark 10-year US Treasury note had spiked higher by almost five basis points to 2.88% while S&P 500 futures (2,630) were pointing to a 1.09% drop at the opening bell.

When compared to December, CPI was 0.5% higher (consensus: 0.4%), led by a higher cost of gasoline (5.7%), apparel (0.8%) and medical care services (0.6%).

On the month, core CPI rose by 0.349% (consensus: 0.2%).

As Jim Reid at Deutsche Bank pointed out in a research note sent to clients on 12 February, Thursday's print meant the CPI release extended a 25-year run of consistently coming in ahead of the consensus forecasts in January to 26.

Now, it remained to be seen whether CPI would also extend its 25-year streak of falling short during the following month, in February.

In the background, there was some 'market chatter' around reports that Cleveland Fed chief Loretta Mester (a well-known 'hawk') had the best odds of being nominated to the post of Federal Reserve vice-president.

On the flip-side, following January's stronger-than-expected jobs report some market commentary appeared to have been highlighting that new Fed chair Jerome Powell's training was not as an economist and - perhaps - even insinuating he might be beholden to the White House, which nominated him.

Pantheon Macroeconomics, Barclays Research see 4 Fed hikes in 2018

Back on the subject of Wednesday's data, Ian Shepherdson, chief US economist at Pantheon Macroeconomics, perhaps one of the more 'hawkish' economists in terms of his inflation forecasts, said: "Coming so soon after the out-sized Jan wages numbers, it will be easy for inflation bears to spin a story of rising wage gains lifting inflation.

"That's a premature judgement, not least because just two components - apparel and medical services - account for the overshoot against consensus."

Shepherdson also pointed out that gains in apparel costs for last month followed a long stretch of unusually low readings, while those for medical care services were typically "very erratic", so some correction was to be expected in February.

All told, he believed the underlying trend was at roughly 0.2% per month, although that meant CPI would gradually move towards 2.5%, which was consistent with 'core' PCE (the Fed's preferred price gauge) to 2.0% year-on-year.

"[...] likely rather quicker than the Fed and the markets expect. This report does not constitute an inflation disaster, but it's clearly a threat to markets which still don't fully price-in the three hikes the Fed expects; we think four are more likely."

Michael Gapen and Pooja Sriram at Barclays Research were of a similar view when it came to core goods prices (such as apparel and used car prices), pointing out that the rise in the former was the largest increase since February 1990, while the latter was still being impacted by the post-hurricane strength "surge" in auto sales.

Even so, they added that "other core goods were up 0.3% m/m and we will remain watchful for signs that core goods prices have more momentum than we anticipate."