US CPI Reaches Highest Point in Years

Further support for the Federal Reserve’s ambitious rate hike arrived from US consumer prices on Wednesday after both the headline and core annualized inflation figures continued to rise.  Headline inflation printed at 2.10% versus 1.70% a month earlier with rising energy and rent costs spurring the greatest upside pressure in the figure with 5.40% and 3.60% growth respectively.  Core inflation, which strips away the more volatile food and energy components climbed to 2.20% in December from 2.10% a month earlier, with the figure now exceeding the Federal Reserve’s target for 14-straight months.

With unemployment and inflation having reached the Fed’s thresholds, it will be easier to continue tightening monetary policy over the coming months if both trend at current levels.  With the US dollar recovering after a recent selloff, gold briefly fell below $1200 per troy ounce before rebounding.

In a widely anticipated decision, the Bank of Canada opted to leave interest rates on hold at 0.50% during the latest monetary policy meeting while expressing room for further policy accommodation should it be needed.  Though there are some positive developments that are creating a sense of optimism including trade figures indicating the country reaching a surplus for the first time since September of 2014, there remains significant spare capacity.  According to the Central Bank’s statement, slack in the labor market presents a problematic development while inflation trends short of the 2.00% target.

Comments from Governor Stephen Poloz also highlighted the potential for the Bank of Canada to reduce rates from current levels should downside risks materialize over the coming months.  The more dovish outlook catalyzed a steep selloff in the Loonie, sending USDCAD over 200 pips higher from intraday lows.