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Hotter-Than-Expected Inflation Lifts Terminal Rate Forecasts

The Federal Reserve’s preferred inflation measure exceeded expectations in January, bolstering the case for continued tightening in the months ahead. Data released by the Bureau of Economic Analysis this morning showed the core personal consumption expenditures index – targeted by the Fed – rose 0.6 percent in January from the prior month, up 4.7 percent year-over-year – topping consensus estimates. The overall personal consumption expenditures index was up 5.4 percent from a year ago, well above forecasts. 

Personal income rose 0.6 percent month-over-month, led by a 0.9-percent increase in private sector wages and salaries, along with a substantial jump in the Social Security cost of living adjustment. Incomes were 6.4 percent higher relative to the same month last year.

Inflation-adjusted household outlays climbed 1.1 percent, accelerating sharply from a slowdown in the prior month as incomes climbed and credit usage surged. Both the goods and services categories saw gains, suggesting that demand pressures remain broad-based, and “sticky” (in economics parlance). 

Yields jumped and the greenback moved higher as traders raised odds on hikes that would bring the Federal Funds benchmark closer to 5.5 percent than 5.25 – and as hopes for meaningful rate cuts crumbled more conclusively. Two year Treasury yields surged to 4.75 percent, nearing last year’s highs, and equity futures cranked sharply lower.

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