Citi Research’s chief global economist said the latest US inflation data for January came as a “punch in the stomach” for the Federal Reserve, raising the prospect of a 50 basis point rate hike in March.
Consumer Price Index for the month of JanuaryWhich measures the costs of dozens of everyday consumer goods, rose 7.5% year on year, the Labor Department reported Thursday.
“This inflation data came as a punch in the stomach for Jay Powell and his colleagues,” Nathan Sheets told CNBC’s “Squawk Box Asia” on Friday, referring to the Fed chair.
He added, “Their narrative is that as the year progresses, we should see inflation start to recede and then decline. There was no hint of that in the January data.”
The monthly CPI rates were also stronger than expected. The headline and core CPI rose 0.6%, compared to estimates for a 0.4% increase on both metrics.
Even with the challenges posed by the highly contagious omicron variant, Sheets said inflation remains high, and more progress is needed to bring inflation down to 3% for the year.
“I think we will also have to see an increasingly hawkish Fed,” he said. “And I think it’s clear after today’s inflation data, that 50 basis points for March should be on the table.” Even then, he added, that might not be enough.
“What do we have to do during the rest of the year to fight inflation on the ground? Because it doesn’t seem to be going away on its own — at least there’s no sign of it yet,” Sheets said.
Goldman, BoFA predicted seven hikes
Following the latest inflation data, Goldman Sachs said it was raising the Fed’s forecast to include “seven consecutive interest rate increases of 25 basis points” at each of the remaining FOMC meetings in 2022. The investment bank had previously forecast five hikes for this year.
“We see the arguments for a 50 basis point rate hike in March. The money rate level appears to be inappropriate, and the combination of ultra-high inflation, high wage growth and high short-term inflation expectations means fears of a wage rate spiral are worth taking on Seriously,” its analysts said in a note Thursday.
“We can imagine that the FOMC concludes that even a meaningful risk from an outcome as dangerous as a wage-price spiral requires a more aggressive and immediate response,” they added.
Even before the inflation numbers come out, Bank of America Federal Reserve forecast The interest rate hike campaign will be launched starting this year. Economists expect seven rate hikes of a quarter of a percentage point in 2022, followed by four more next year.
Inflation figures come at a crossroads for the US economy, With a rapid growth pace in 2021 It is expected to slow this year as fiscal and monetary stimulus wears off.
Sheets said the momentum for the US economy remains weak and depends on how the Omicron factor works.
“If the Fed is going to get help with inflation, that has to come from improvements in the pandemic, some rebalancing away from the hot goods sector to services, and we need to see some easing of severe stresses in supply chains,” he added.
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