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PIMCO: January US Inflation data leads to concerns of further Fed hikes

With the announcement that US inflation has hit 7.5%, the highest for 40 years, Tiffany Wilding, North American Economist at PIMCO gives her comments:

 

  • Another firmer than expected inflation print, was driven by price hikes across a variety of retail goods. The price level of the core CPI advanced 0.6% m/m against our expectations for a more moderate (+0.3% m/m) lift. The miss relative to our forecast was mainly within the retail goods category.
  • However, this coupled with our expectation for a modest increase in core retail sales of 0.4% suggests that real consumption likely contracted again in January. As a result, although this print lifts our inflation forecasts – we are now projecting core CPI inflation to end 2022 running at 3.6% pace (vs 3.3% prior) –  we are also lowering our 1Q real GDP forecast to 0.5% vs 1% previously.
  • Regarding monetary policy, this print surely increases the probability of the Federal Reserve increasing rates by 50 basis points in March, and consistently the market pricing moved to a 50% probability. However, we still think the Fed would prefer to hike sequentially at every meeting, instead of a more abrupt adjustment. Furthermore, if the credit card data that we use to forecast retail sales turns out to be right, the combination of the CPI and retail sales prints suggests that the ability to pass on further price adjustments may be waning. Nevertheless, this print will surely concern the Fed, and makes it tough for them to push back against market pricing. At a minimum, today’s data solidifies our expectation that the Fed will likely begin hiking rates at a once per meeting pace.

 

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