There's Enough Inflation for Yellen to Possibly Impose a Rate Hike… or Maybe Even Two
If a lack of inflation was the only thing holding Janet Yellen back from putting the implied two-to-three interest rate hikes into place this year, she's going to have a tough time justifying not doing so now. It's palpable even with the impact of low oil prices, but it's downright concerning when stripping out the effect weak oil prices have had.
The news came this week.
On Wednesday we learned producer prices grew 0.1% last month, and were up 0.4% on a core (ex-food and ex-energy) basis. Annualized, that translates into producer price inflation "rates" of -0.3% and 0.6%, respectively. Both are still low by historical standards, but both are decidedly in an uptrend. At the current rate of change, producer inflation will reach normal/healthy levels in just a few months; the risk of debilitating inflation levels would materialize shortly after that if momentum was allowed to develop.
As for consumer inflation, we're already pushing our luck. On Friday we learned overall consumer prices were flat in January, but up 0.3% on a core basis. That translates into annualized inflation rates of 1.37% and 2.2%, respectively. Both are near enough to the Fed's targeted inflation rate of around 2.0% to get Janet Yellen and the Federal Reserve's voting members at least thinking about nipping inflation in the bud via a rate hike — or maybe even two — in the foreseeable future.
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It won't be easy. While inflation points to economic health, not much else does. Although normally rising interest rates coincide with strength, this market is vulnerable to investor concerns that it might not be able to withstand the headwinds higher interest rates could create. How she spins it (the language she uses to sell it to the market) will be critical.