Consumer Price Index surprise is just a blip

Consumer prices jump higher than expected, roiling Wall Street

The Indices of Industrial Production (IIP) for the mining, manufacturing and electricity sectors for the month of December 2017 stood at 115.5, 131.6 and 143.9 respectively, with the corresponding growth rates of 1.2, 8.4 and 4.4 percent as compared to December 2016. Within the food items, the inflation fell for vegetables to 26.97%, sugar and confectionery 2.85%, cereals and products 2.33% and fruits 6.24%.

"Some of laws of normal economic nature seem to be reasserting themselves", Nathan Sheets, chief economist for PGIM Fixed Income and a former Fed and Treasury official, said on Bloomberg Television.

Fuel and light inflation has seen increase of 7.73%.

Thomas Wells, manager of the Smith & Williamson Global Inflation-Linked Bond fund, said: "UK inflation remains elevated, and with CPI remaining at 3.0%, there is a good probability the BoE will not be able to get CPI inflation back to the 2% target this year". The FTSE is heading into the close just 3 points higher at 7180 after bouncing off 7200.

Similarly, indicating a revival in consumer demand, consumer durables grew 0.9 per cent compared to a decline of 5 per cent in December 2016.

The Dow Jones industrial index, S&P 500 and Nasdaq took 0.5 percent losses upon Wednesday's open.

US stocks opened lower as fears of firming inflation intensified after a report showed consumer prices in January rose faster than expected.

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Inflation shows a slight slowdown for January giving a sign of relief for consumers.

The major currencies spent much of Monday in a holding pattern following a particularly hectic few days of trading amid last week's sharp sell-off in equity markets. "Could three per cent mark the peak for inflation?", said Maike Currie, investment director for personal investing at Fidelity International.

CPI headline inflation was below economists' expectations in eight of the last 10 reports.

Recently, the current volatility in the financial markets has been because analysts expect inflation to continue to rise which may lead to more rate hikes.

The lion's share of the downward pressure on inflation came from motor fuel prices, according to ONS senior statistician James Tucker.

If the market believed that the CPI surprise represented a trend rather than a blip, it would bid up real yields, expecting the Federal Reserve to raise interest rates in the future (expectations about the future federal funds rate are the big near-term determinant of real yields). However, over the coming months, the CPI reading is forecast to only fall back very gradually towards the Bank of England's 2% target.

Fed policy makers will also have February CPI data in hand before they next meet March 20-21 in Jerome Powell's first gathering as chairman. December's figures were revised to show little change, after an initially reported gain of 0.4 percent.