Federal Reserve Chair Janet Yellen and her colleagues are getting exactly what they wished for. Just way faster than they, and most economists, expected this year.
The prices of goods and services consumers buy, excluding food and fuel, rose 0.3 percent in January from December, the biggest gain since 2012, figures from the Commerce Department showed Friday in Washington. That pushed costs up 1.7 percent over the past 12 months, already exceeding the 1.6 percent Fed officials forecast for the fourth quarter of 2016.
The central bank’s goal is to get total inflation up to 2 percent, a level consistent with a healthy economy because anything less threatens to mire the U.S. in the type of too-low price pressures that have hobbled countries like Japan for decades. The jump in prices makes it more likely that members of the policy-making Federal Open Market Committee, who next meet in March, will continue to raise interest rates. The trick, though, will be to time those increases in a way that keeps economic growth humming while preventing prices from overshooting their goal.
“Overall, the committee is going to see this as good news and will be less worried about inflation being too low,” said Roberto Perli, a former Fed official who’s now a partner at Cornerstone Macro LLC in Washington. “It is closer to the sweet spot. This is consistent with a gradual policy path. It gives them room to raise rates, but again very slowly. I don’t think it puts March in play.” Perli expects the next rate increase in June.
Prior to Friday’s data, investors had assigned very low odds to the prospect of any rate increase this year even as Fed officials had penciled in an additional one percentage point in hikes through 2016.
Those expectations shifted higher amid the inflation news Friday, with traders’ odds rising above 50 percent for at least one rate rise by the December meeting, according to Bloomberg calculations of interest-rate probabilitiesfrom federal funds futures. Chances for an increase at the June meeting climbed to 35 percent on Friday from 24 percent on Thursday.
Even including food and fuel, which is the measure preferred by Fed officials, prices over the past 12 months climbed 1.3 percent compared with a 0.7 percent increase at the end of 2015. As oil prices stabilize, the gauge is likely to keep marching toward 2 percent.