After today's CPI report, economists at CIBC note that shelter costs account for 40% of the core CPI basket and that component tends to be sticky, something that will worry the Fed with housing costs rising. They see rent prices continuing to rise as people return to cities.
Overall, they still see a 25 basis point hike in March and just 100 basis points this year as prices moderate starting April. That compares to the market pricing in a 60% chance of a 50 bps hike in March and roughly 157 bps of hiking before year end.
Inflation will likely accelerate further above the 7% mark next month, while core inflation is also set to accelerate, as higher energy prices combine with base effects and strong demand in core categories. By April, however, the indices will be lapping some elevated readings from a year ago in which the previous re-opening took place, and annual inflation will therefore start to decelerate. Core inflation is set to end the year at just above the 2% target. Still, the Fed will be focused on the underlying acceleration in shelter prices and the tightness in the labor market as reason to take rates higher by 100bps this year, with the first 25bps hike coming in March.
Expect many more volatile days like today. The S&P 500 is on the lows.
