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Well-prepared markets take hotter-than-expected inflation print in stride

Consumer price growth accelerated in the United States last month, suggesting that January’s hotter-than-expected print signalled a re-acceleration in underlying inflation pressures, and raising the odds on a more hawkish outlook from the Federal Reserve at next week’s policy meeting. According to data published by the Bureau of Labor Statistics this morning, the core consumer price index – with highly-volatile food and energy prices excluded – rose 3.8 percent in February from the same period last year, up 0.4 percent on a month-over-month basis. This slightly exceeded consensus estimates among economists polled by the major data providers ahead of the release, which were set closer to the 3.1-percent mark.

On a headline all-items basis, prices rose 0.4 percent on a month-over-month basis in February, up 3.2 percent over the previous year, topping the 0.3-percent pace set in January. Americans paid 2.3 percent more for energy on a month-over-month basis, with higher gasoline prices helping to reverse January’s -0.9 percent drop, while the shelter sub-index climbed 0.4 percent after rising 0.6 percent in the prior month. Food price growth stabilised at 0.4 percent month over month.

According to our estimates, the so-called “supercore” measure—which captures core services minus housing—rose 0.47 percent month-over-month, down from 0.85 percent in January, but far too hot for the Federal Reserve’s comfort.

Short-term Treasury yields are up modestly as investors pull back expectations for rate cuts from the Federal Reserve, and the dollar is adding to this morning’s gains – but equity futures are climbing, suggesting that markets were well prepared for a hotter-than-anticipated print.

Bottom line: Although markets appear to have feared something even worse, today’s data suggests that January’s acceleration in price pressures wasn’t a one-off. Policymakers at the Federal Reserve are likely to tread more cautiously, with the expected year-end Fed Funds rate embedded in next week’s “dot plot” summary of economic projections subject to a precautionary upward shift. Officials are also likely to express more hawkish perspectives in upcoming appearances, and the dollar’s ascendance could resume accordingly.

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