Macro of the Week – US inflation accelerates

US CPI inflation surprised markets, remaining unchanged in January at 2.1%, driven by sharp increases in clothing and energy costs. There had been expectations for a fall to 1.9%. Core inflation was also stable at 1.8%, again above expectations for 1.7%. The higher than expected figure initially caused markets to sell-off and bond yields to rise with investors anticipating higher interest rates, although equity markets recovered relatively quickly. The increase in inflation was broad based, and while the figure was pushed higher by a 5.5% year-on-year rise in the energy component, there were notable increases month-on-month in the price of clothing (1.7%), transportation (0.8%) and medical services (0.6%). The minutes from the FOMC in December indicated that they expect to increase interest rates 3 times in 2018. The Fed Funds Market shows that investors generally expect 3 rate hikes this year, with significantly increased chances of 4 rate rises since the start of the year. Although all these signs point to an overheating US economy, US industrial production actually slowed 0.1% month-on-month in January, indicating that there may be further to go in this business cycle.