New York, Dusseldorf The price development in the USA is becoming more and more dramatic: In January the inflation rate reached its highest value since February 1982, as the US Department of Labor announced on Thursday. Accordingly, consumer prices rose by 7.5 percent year-on-year. In December, the value was still 7.0 percent.
Economists had expected an average increase of 7.3 percent. It was the fifth time in six months that inflation has come in above expectations. Core inflation, which excludes volatile energy and food prices, rose to 6 percent. Experts had expected values of 5.9 percent here.
Food, electricity and housing expenses proved to be the main price drivers. “A look at the details continues to show relatively broad inflationary pressure across the most important groups of goods,” commented Commerzbank economists Christoph Balz and Bernd Weidensteiner.
The new inflation figures intensify the discussion about the future course of the US Federal Reserve (Fed). At the most recent meeting in January, Fed Chairman Jerome Powell signaled that interest rates should rise from March in order to get inflation under control.
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Those numbers raise the possibility of more aggressive rate hikes, said Naeem Aslam, chief market analyst at brokerage firm AvaTrade. He expects the rate to rise by a total of 100 basis points by July.
Significant interest rate hike possible
Before the inflation figures, most investors had expected interest rates to rise by 25 basis points to a range of 0.25 to 0.5 percent in March. However, they now estimate the probability of a first rate hike of 50 basis points in March at around 50 percent. Before the numbers, the rate was around 30 percent.
Several Fed members had recently signaled that a more significant increase was possible. In a speech on Tuesday, Loretta Mester from the regional Cleveland Fed advocated raising interest rates faster than when interest rates were reversed in 2015. “Inflation is significantly higher and the labor market is significantly stronger,” she pointed out.
Patrick Harker, chief of the Philadelphia Fed, also said earlier this month that a “spike” in inflation would call for a more aggressive stance. An increase of 50 basis points would then be possible as early as March.
The inflation figures caused movement on the financial markets: the leading German index Dax and the EuroStoxx 50 turned negative. Prices also fell on the crypto market, Bitcoin fell from $44,800 to below $44,000.
US bond yields hit two-year highs
Bond yields, on the other hand, rose – the benchmark 10-year US Treasury bond approached the 2.0 percent level and rose to its highest level in two and a half years. The dollar index, which reflects the exchange rate for important currencies, also benefited from the figures with a price increase of up to 0.4 percent to 95.92 points.
The Fed not only wants to raise interest rates, but before that the bond purchase program that was introduced during the pandemic should be completed. The Fed sporadically bought $80 billion a month in Treasuries and $40 billion a month in Mortgage Backed Securities (MBS).
In addition, the Fed is planning to melt down its total assets, which had grown to almost nine trillion dollars during the corona crisis. This would deprive the financial markets of liquidity. She can proceed relatively gently and no longer replace expiring papers with new ones. But Fed Cleveland Chair Mester suggested on Tuesday to sell the mortgage bonds. That would be the more aggressive option and could accelerate the process announced by Fed Chairman Powell to focus the Fed’s total assets on government bonds again.
More: “Plenty of room for rate hikes” – Fed Chair Powell primes markets for significant turnaround.