According to the latest CPI data from the Bureau of Labor Statistics, the All Items index also rose 2.1% and not the expected 1.9%.
However, this data saw investors fearing the effects of higher inflation as government yields climbed to 2.87%, after hitting a four-year high of 2.9% on Monday.
Neil Birrell, chief investment officer at Premier Asset Management, said because the data came out above expectations, “we are likely to see higher bond yields, a higher dollar and lower equity markets”.
This sell-off also fed through to other global government bond markets. Craig Inches, head of short rates and cash at Royal London Asset Management, noted that gilt and bund yields also spiked.
Inches said: “While the next psychological barrier for 10-year treasury yields of 3% is still a little way off, this latest data is likely to reignite the diet of increased volatility currently feeding both bond and equity markets, although fixed income assets should weather this better.”
Stars are aligned for inflation
Following the volatility faced by global markets last week, investors were likely hoping for a benign US inflation report to allay some of the fears about rising interest rates and more hawkish central banks.
Yet Richard Carter, head of fixed interest research at Quilter Cheviot, explained that this was clearly not the case. “While some of the jump was due to clothing prices, the strength was broad-based enough to justify further interest rate hikes from the Federal Reserve,” he said.
“We would expect this number to lead to more short-term turbulence as markets continue to fret about a regime shift taking place.”
Luke Bartholomew, investment strategist at Aberdeen Standard Investments agreed and said that while the data shows a “strong number”, it will be interesting to see how financial markets react.
He added: “There’s a risk that this could pour fuel on the fire of last week’s market sell-off. That boiled down to real sensitivity to the prospect of higher inflation that markets had anticipated. That nervousness is not going away.
“With unemployment so low, growth going to get big boost from tax cuts and the newly announced spending increases, the stars are aligned for inflation to pick up more from here. So, this could set off another round of selling as some investors fret about what it means for US interest rates.”
On Tuesday, Fed chair Jerome Powell suggested that the Fed would continue as normal with gradual rate increases but remain alert to any developing risks to financial stability.
Bartholomew added: “The Fed is now very likely to follow through on its plan to raise rates again in March. The recent market sell-off will have already played into their hands as the value of assets didn’t really reflect the Fed’s tightening over the last year.
“If the sell-off gathers real momentum then they will need to think about their plans again but we’re a long way from there.”
