Markets Are Betting Against Central Bank Guidance as Inflation Spikes

Global central bankers are urging traders against bets on a supersized policy response to soaring inflation, amid continued hope they can successfully cool mounting price pressures without derailing economic recoveries.

The news Thursday that U.S. inflation exceeded expectations in January, soaring at the fastest pace since the early 1980s, sent investors and economists scrambling to revise their playbooks for the Federal Reserve and fellow central banks.

Financial markets are now betting the Fed will boost its benchmark rate seven times this year, with speculation mounting it will hike by half-a-percentage point in March, in the first such move since 2000. In the U.K, traders expect a half point increase by the Bank of England in the next three months, a move not seen since it became independent in 1997.

Hottest Inflation Since 1982

U.S. headline and core CPI both rose more than forecast in January

Source: Bureau of Labor Statistics, Bloomberg survey

Market expectations are now racing ahead of central bank guidance. Karen Ward, chief market strategist for Europe at JPMorgan Asset Management, said the reaction was understandable as traders respond to surging inflation figures.

“Every month the numbers are getting higher. The idea that inflation will go away on its own accord is becoming an increasingly distant prospect,” she said. “The tail risk that central banks will have to slam on the brakes is rising.”

It’s not just traders getting caught up in the idea of aggressive monetary tightening.

Goldman Sachs Group Inc. economists now see seven U.S. rate increases this year, while their peers at banks including Citigroup Inc., HSBC Holdings Plc and Deutsche Bank AG predict a salvo of 50 basis points will be delivered next month.

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