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FEBRUARY 20, 2018 – JANUARY CPI EXCEEDS EXPECTATIONS
The headline CPI rose 0.5 percent exceeding expectations for a 0.3 percent rise, which resulted in a year-on-year growth rate of 2.1 percent, the same as reported in December. The core CPI increased 0.3 percent following a 0.2 percent gain in December. The year-on-year rate of change in the core CPI is holding steady at 1.8 percent.
Even though the pickup in core inflation remains slow, there are fears inflation is about to ramp up. Price pressures last month were “broad-based” with rises in gasoline, housing, clothing, medical care and food. The markets reacted sharply to the news, with the stock market taking a hit, while government bond yields became higher. A strong rise in inflation would send borrowing costs higher and could cut into corporate profits. Investors are becoming increasingly confident the Federal Reserve will raise rates at least three times this year.
The markets have increased the probability for a March rate hike, which has been seen as a certainty, and moved up the likelihood of a second move in June. As rates are still low but poised to move, it is the time to take advantage of the financial markets to hedge your future interest rate payment obligations. Interest rate swaps are the best way to lock in low rates today.