There was nothing consoling in this CPI report. There was no evidence of a hit from Omicron: on the contrary, services inflation accelerated. Together with the January payrolls report, it paints a sobering picture of a central bank that has fallen behind the curve. It is worth noting: initial claims dipped again by 16k to 223k in the week ending February 5th. Both wages and inflation are accelerating. The headline CPI rate hit 7.48%. Workers are going to have to push harder for pay increases: real average hourly earnings dropped 1.67% y/y at the start of 2022.
The Atlanta Fed wage tracker is now at 6.1% y/y. The Cleveland Fed median CPI posted 0.58% m/m, a new high. Two-year Treasury yields surged to 1.58%. The strength of the CPI and wage numbers increases the possibility that the Fed rate hikes now priced in for this year are brought forward into H1.
Equities have largely taken the CPI report in their stride. But it is plausible that the Federal funds rate will be up 100-125 basis points by June. The Fed will not be at all comfortable with stronger wages feeding through to inflation. The Atlanta Fed sticky price CPI has broken out too.
