Fed Cornered: Core CPI Jumps Near 4 Year Highs As Rent Rises At Fastest Rate In 9 Years

Just as we warned, the gas price 'base effect' is pressuring consumer price indices higher (Energy +1.3% MoM - up for 3rd month in a row) but even Core CPI rose more than expected (+2.3% vs 2.2% exp) back near its highest since April 2012. Shelter costs rose 0.3% MoM (but 3.5% YoY - the highest since July 2007), along with increases in education, medical care, and airline fares also sent consumer prices broadly higher. Between surging PPI and this, The Fed is increasingly cornered (and as we nopted last night, running out of excuses).

“We’re starting to see upward pressure on the inflation numbers,” Jim O’Sullivan, chief U.S. economist at High Frequency Economics Ltd., said before the report. “It reinforces the case for the Fed to resume tightening, though they’re highly risk averse right now.”

Core Cpi back near cycle highs...


Rent inflation at its highest in 9 years!!


And fuel costs are on the rise, which, as we detailed previously, the impact of the energy costs base-effect is so pronounced, that as BofA notes, an extreme bearish scenario is needed for inflation to stall. A far less extreme scenario is needed for inflation to jump dramatically. To wit:

Our analysis shows that there is a clear uptrend in CPI ahead, under most reasonable scenarios (Chart 1). CPI would accelerate to 3.5% yoy under our bull case, and rise to 1.6% under our bear case. Supportive base effects are a key driver. It is only under an extreme bear case (year-end wholesale gasoline price of $0.88/gallon, or retail at $1.58/gallon), that we would see CPI inflation flatten out at 1.1%, all else equal.

As we concluded previously, keep a very close eye on gas prices: over the next few months, gas prices will become far more important to the Fed's monteray policy than even China.

So - to sum up - the base effect in energy is pushing headline higher while surging rent inflation is now at highest in 9 years... Get back to work Ms. Yellen!