U.S. consumer prices in surprise January rise

U.S. consumer prices rose more than expected in January, with a measure of underlying inflation posting its biggest gain in a year, strengthening expectations that price pressures will accelerate this year and prompt a faster pace of interest rate increases from the Federal Reserve.

The fairly strong inflation report from the Labour Department on Wednesday could put more pressure on U.S. financial markets, which were spooked by a surge in annual wage growth in January. Inflation concerns sparked a sell-off on Wall Street and boosted benchmark U.S. Treasury yields to a four-year high.

There are fears that inflation, which is seen as being driven by a tightening labour market and increased government spending, could force the Fed to be a bit more aggressive in raising rates this year than is currently anticipated. That would slow economic growth.

"Inflation has been the missing piece in the puzzle for rate hikes over the past several months, which had led some members of the [Federal Open Market Committee] to dissent on rate hike decisions over the past year," said Leslie Preston, senior economist at TD. "Today's report increases our confidence that the Fed will raise rates in March."

The U.S. central bank has forecast three rate hikes for this year, with the first increase expected next month.

The Labour Department said its Consumer Price Index increased 0.5 per cent last month as households paid more for gasoline, rental accommodation and healthcare. The CPI rose 0.2 per cent in December. The year-on-year increase in the CPI was unchanged at 2.1 per cent as the large price gains from last year dropped out of the calculation.

Excluding the volatile food and energy components, the CPI shot up 0.3 per cent. That was the largest increase since January 2017 and followed a 0.2 percent rise in December. The year-on-year rise in the so-called core CPI was unchanged at 1.8 percent in January, also because of less favourable base effects.

Economists polled by Reuters had forecast the CPI increasing 0.3 per cent in January and the core CPI rising 0.2 per cent.

The core CPI is viewed as a better measure of underlying inflation trends. The Fed tracks a different index, the personal consumption expenditures price index excluding food and energy, which has consistently undershot the central bank's two per cent target since mid-2012.

Inflation building up

Base effects will turn more favourable in March, which economists say would set the course for higher annual inflation readings. Average hourly earnings jumped 2.9 per cent on an annual basis in January, the largest rise since June 2009, from 2.7 per cent in December.

A pickup in wage growth as the labour market hits full employment is expected to contribute to higher inflation this year. Price pressures are also seen being fanned by fiscal stimulus in the form of a $1.5 trillion US tax cut package and increased government spending.