The US CPI increase or Consumer prices were seen to be rising more than expected during the month of January, official data showed last week. Headline CPI increased 0.5% on a month over month basis while core inflation rate rose 0.3% on the month.

This was higher than the forecasts of 0.3% on the headline and 0.2% on the core. On an annual basis, core CPI was seen accelerating 1.8% which was higher than the estimates of 1.7% increase. The headline CPI rose 2.1% on an annual basis which was higher than the forecasts of 1.9%.

The US CPI increase was attributed to higher oil prices including shelter costs such as rent, food and apparel. Energy prices were seen rising 3.0% in January compared to the previous month. Gasoline costs alone rose 5.7% while transportation services costs rose 0.8%.

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U.S. Annual Inflation Rate: 2.1%, Jan 2018 (Source: Tradingeconomics.com)

The higher than expected inflation data adds to the market view about faster rate hikes from the Fed. The initial reaction was seen with the equity markets briefly dipping on the news. The last two weeks of equity market correction comes amid investor fears about higher interest rates from the Federal Reserve.

Although the headline US CPI increase was above the Fed’s 2% threshold, the Federal Reserve Committee looks to the Core PCE data which is seen as a more accurate measure of inflation. However, data suggests that the headline CPI often leads the core PCE.

Digging deeper, the inflation data showed that wage inflation remained muted. On a seasonally adjusted basis real average weekly earnings were seen falling 0.8% on a month over month basis. This brought the annual earnings to just 0.4%. Despite the somewhat mixed picture, the overall inflation landscape was seen to be showing signs of strengthening.

The real wage data comes amid a mixed picture. A few weeks ago the U.S. Labor Department said that wages were rising in the U.S.

Retail sales remain soft

Besides the CPI data, retail sales for January showed a softer picture. Headline retail sales missed forecasts for January as they fell 0.3% on the month. Expectations showed a 0.2% increase. The decline was seen to be the largest monthly decline over the past eleven months.

Retail sales excluding autos were seen to be flat on the month. Economists were forecasting a 0.5% increase but core retail sales fell 0.2% instead. Sales of autos also declined 1.3% on the month dampening the retail sales outlook.

The weaker retail sales report comes amid the fact that consumer spending was seen to be rising 3.6% on an annual basis. With strong growth in the labor market and rising wages, retail sales is expected to pick up.

However, the fact that interest rates are expected to rise, also adds to the view that perhaps consumers are likely saving rather than spending.

FOMC meeting minutes

The FOMC meeting minutes will be released later today. The minutes cover the January Fed meeting where interest rates were left unchanged. It was also the last FOMC meeting to be chaired by Janet Yellen.

The meeting minutes are unlikely to spring any surprises but investors will be looking for any hawkish signals from the minutes that could indicate the timing of the next rate hike.

With Jerome Powell appointed as the new chair of the Federal Reserve, the markets are expecting to see a continuation to Yellen’s policies. At the December Fed meeting, the FOMC members penciled three rate hikes for 2018.

The next Fed meeting is scheduled for in March. This Fed meeting will also be followed by the press conference. The Federal Reserve has traditionally used these Fed meetings which happens four times a year as the ideal time to hike interest rates.