Rebound in inflation gives Fed less wiggle room

The rise in CPI inflation to a five-year high of 2.5% in January was principally due to a surge in gasoline prices, which appears to have been partly reversed in February. Nevertheless, with headline inflation now much closer to the Fed’s target, it will be harder for the FOMC to delay planned interest rate hikes this year, as it has done in response to unexpected events over the past couple of years. Admittedly, core inflation has not increased by any meaningful degree over the past 12 months. But with economic growth accelerating in the second half of last year and the survey evidence pointing to a further pick-up in the first half of this year, the Fed has a lot less wiggle room now.