Inflation in the US broke through the Federal Reserve's two per cent target in December for the first time since 2014, strengthening the case for a rise in interest rates over the coming year.
Consumer prices rose by an annual rate of 2.1 per cent in December, after inflation of 1.7 per cent the month before, according to the Bureau of Labor Statistics. This was in line with consensus expectations.
Price rises were driven by fuel, which has become more expensive since a production cut by Opec (the Organisation of the Petroleum Exporting Countries) at the end of November. Meanwhile, core inflation (which excludes more volatile items) edged up to 2.2 per cent.
Inflation fell sharply in the world's largest economy in 2014, with deflation rearing its head at the start of 2015. However, inflation has risen since then, with a consistent upward trend since July of last year.
The higher rate of inflation could prompt the US Federal Reserve to raise interest rates faster as it aims to slow the supply of money to the economy. It is mandated to target longer-term inflation of two per cent.
The pressure on the Federal Reserve to raise interest rates could be heightened as US President-elect Donald Trump's fiscal policy becomes clearer. US bond markets suffered a massive sell-off in the wake of the election as investors' expectations of inflation, and rate rises in response, increased.
Trump's apparent promise of stimulus measures, a mixture of a trillion-dollar investment plan and big tax cuts, is set to boost inflation markedly – so-called Trumpflation. The dollar has soared over the past two months in response, although it has since sold off somewhat as investors have backed off slightly.
At its last meeting the consensus of members of the rate-setting Federal Open Market Committee (FOMC) implied there would be three rate hikes over the course of 2017. Federal fund futures imply only a four per cent chance of an interest rate rise at the next rate-setting meeting in February, according to analysis from CME Group.