U.S. Inflation Charges Higher With Larger-Than-Forecast Gain

  • Price index posts largest 12-month increase since 1982

  • Traders boost expectations for half-point Fed hike in March

A shopper inside a women's clothing store in the East Village neighborhood of Des Moines, Iowa.Photographer: Kathryn Gamble/Bloomberg

U.S. consumer prices surged in January by more than expected, sending the annual inflation rate to a fresh four-decade high and adding more urgency to the Federal Reserve’s plans to start raising interest rates.

The consumer price index climbed 7.5% from a year earlier following a 7% annual gain in December, according to Labor Department data released Thursday. The widely followed inflation gauge rose 0.6% in January from a month earlier, reflecting broad increases that included higher food, electricity and housing costs.

Excluding the volatile food and energy components, so-called core prices increased 6% from a year ago, also the most since 1982, and 0.6% from a month earlier.

Hottest Inflation Since 1982

U.S. headline and core CPI both rose more than forecast in January

U.S. Treasury yields surged, the dollar rose and stock futures slumped following the report. Economists projected a 7.3% year-over-year increase in the CPI and 0.4% gain from a month earlier, according to the Bloomberg survey medians.

The data reinforce the Fed’s intentions to begin raising rates next month to combat broad-based inflationary pressures and could lead markets to expect even more aggressive action from the central bank. The steady run-up in prices has eroded recent wage gains and diminished American families’ purchasing power, sucking much of the air out of what has been an exceptional bounceback in the U.S. economy.

Leading up to the Fed’s March 15-16 meeting, policy makers will also have the February CPI and employment reports in hand.

Investors boosted their expectations for a a half-point increase in the federal funds target rate in March following the report. While most economists expect a more gradual approach to liftoff -- as has been telegraphed by several Fed officials -- the acceleration of inflation on the heels of rapid wage gains will keep the possibility of a half-point hike on the table.

Source: Bloomberg