U.S. inflation knowledge is sort of a ‘punch within the abdomen’ for the Fed, says Citi economist


The most recent U.S. January inflation knowledge got here in like a “punch within the abdomen” for the Federal Reserve, which raises the likelihood for an aggressive 50 foundation factors price hike in March, the worldwide chief economist of Citi Analysis mentioned.

The consumer price index for January, which measures the prices of dozens of on a regular basis shopper items, rose 7.5% year-on-year, the Labor Division reported Thursday.

“This inflation knowledge right this moment got here like a punch within the abdomen for Jay Powell and his colleagues,” Nathan Sheets informed CNBC’s “Squawk Field Asia” on Friday, referring to the Fed chairman.

“Their narrative is that because the 12 months progresses, we should always see inflation begin to abate and to come back on down. And there was not even a touch of that within the January knowledge,” he added.

The month-to-month CPI charges additionally got here in stronger than anticipated. Each headline and core CPI rose 0.6%, in comparison with estimates for a 0.4% improve by each measures.

Even with the challenges posed by the extremely contagious omicron variant, inflation nonetheless stays excessive, and extra progress must be made to deliver inflation down to three% for this 12 months, Sheets mentioned.

“I believe we’re additionally going to must see an more and more aggressive Federal Reserve. And I believe that clearly after right this moment’s inflation knowledge, 50 foundation factors for March must be on the desk,” he mentioned. Even then, he added, it will not be sufficient.

“What are we going to must do by way of the remainder of the 12 months to wrestle inflation to the bottom? As a result of it would not seem to be it is abating by itself — not less than there is no signal of that but,” mentioned Sheets.

Goldman, BoFA predict seven hikes

Following the newest inflation knowledge, Goldman Sachs mentioned it was elevating its Fed forecast to incorporate “seven consecutive 25bp price hikes” at every of the remaining Federal Open Market Committee assembly in 2022. The funding financial institution had beforehand predicted 5 hikes for the 12 months.

“We see the arguments for a 50bp price hike in March. The extent of the funds price seems inappropriate, and the mixture of very excessive inflation, scorching wage progress and excessive short-term inflation expectations signifies that issues about falling right into a wage-price spiral should be taken severely,” its analysts mentioned it a be aware on Thursday.

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“We may think about the FOMC concluding that even a significant threat of an end result as critical as a wage-price spiral requires a extra aggressive and instant response,” they added.

Even earlier than the inflation numbers have been out, Bank of America predicted the Fed will launch an aggressive price hike marketing campaign beginning this 12 months. It is economists expect seven quarter-percentage-point price hikes in 2022, adopted by 4 extra subsequent 12 months.

The inflation numbers come at a crossroads for the U.S. financial system, with 2021?s rapid growth pace anticipated to sluggish this 12 months as fiscal and financial stimulus fade.

The momentum for the U.S. financial system stays tender and relies upon how the omicron issue performs out, Sheets mentioned.

“If the Fed goes to get an help on inflation, it is bought to come back from enhancements within the pandemic, some rebalancing away from the purple scorching items sector into providers, and we have to see some attenuation of the nonetheless intense pressures in provide chains,” he added. 

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