US inflation fears have come about due to the increase in US Consumer prices in January. The US CPI rose 0.5% last month compared to the estimated 0.2%. If we exclude volatile energy and food prices, the Consumer Price Index rose by 0.3%, closer to the estimate.
Markets quickly reacted to this news. Although the Dow opened lower by 100 points, this quickly recovered after an hour of trading. Much of this has been attributed to the tightening of labor and product markets. This happened because of a more rapid rate of economic growth than was expected increasing prices.
Federal Reserve Interest Rate Hikes
Another issue likely to fuel US inflation is the expected three Federal Reserve interest rate hikes this year. A surge in inflation will be likely to lead to increased bond yields, and a depressed stock market. Too high an inflation rate would increase the cost of borrowing, and possibly reduce corporate profits.
The Fed is aiming for 1.25% US inflation rate, with a benchmark max of 1.5%. Anything much above that figure could result in remedial action being taken. That likely being increased interest rates.
US Inflation May Lead to a March Interest Rate Hike
A Fed rate increase in March is now almost certain. If US inflation increases much more than current, then it is fairly likely for there to be another interest rate increase in June. Another rate increase in December is also a distinct possibility. Some analysts believe that if the Fed related less to price fluctuations and what may be temporary inflation figures then there might be more stability in the economy.
US Inflation Rate and Personal Consumption Index
The Fed looks at a 2% inflation level to indicate an economy that is not increasing at too rapid a rate It still seems, however, that it would prefer the inflation rate remained around the 1.25% – 1.5% figure. However, inflation is not what the Federal Reserve uses as its main yardstick for rate changes. The personal consumption expenditures index is regarded as being a more important indicator.