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    US inflation rises to 14-month high in January; dollar spikes to 2-week high

    Inflation in the United States rose to the highest rate in 14 months in January as the all-items consumer price index (CPI) climbed to 1.4% year-on-year. The figure was slightly above consensus estimates of 1.3%. On a month-on-month basis, CPI was unchanged from the previous month versus estimates of a 0.1% drop.

    Core CPI, which excludes food and energy items, also beat estimates, rising by 0.3% month-on-month versus the expected 0.2% rate, and by 2.2% year-on-year versus expectations of a 2.1% rate. The annual rise in core inflation was the highest in 4½ years amid signs of strengthening underlying price pressures in the US economy.

    A smaller decline in fuel and energy prices was the main reason for pushing up the headline CPI rate in January. The energy component of CPI fell at the lowest annual rate (by 6.5%) since November 2014. But other components also appeared to be driving prices higher with housing and medical care costs contributing the most to the increase in the core rate. Housing (shelter) and medical care costs were up 3.2% and 3.0% respectively over the past 12 months.

    Today’s data should support the Fed’s view that inflation should start to accelerate towards its 2% objective once transitory factors such as lower oil prices start to drop out of the annual CPI calculations. The more recent falls in the price of oil may yet push down the CPI rate in the coming months. However, the Fed is more likely to pay attention to the core rate, which has been slowly ticking up since the second half of 2015. Another closely watched indicator by the Fed is the core PCE price index, which is still far below the Fed’s target at 1.4% (in December).

    The dollar initially reacted positively to the data, with the dollar index briefly spiking up to a 2-week high of 97.10. However, it soon retreated back to levels before the data as traders remain cautious as to the Fed’s rate path outlook. Dovish FOMC minutes released this week contrasted with more hawkish comments by two Fed officials. San Francisco Fed President John Williams appeared confident about the US economic outlook, while Cleveland Fed President Loretta Mester sounded cautiously optimistic that the US economy will overcome the current volatility in financial markets. The FOMC is due to next meet in March 15-16 when it will publish an updated dot plot of interest rate projections.

    The euro dropped to an intra-day low of 1.1066 dollars after the data but quickly recovered to 1.1108 in late European trading. Against the yen, the dollar was flat just below 113 yen, while cable firmed slightly to 1.4276 dollars from an earlier low of 1.4246.

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