Data released last Friday showed that US overall CPI remained unchanged in Jan after slipping 0.1 percent in Dec. The CPI increased 1.4 percent in the 12 months through Jan, the biggest rise since Oct 2014, after gaining 0.7 percent in Dec. We are skeptical that the rise in core CPI would be sustained. However, revisions to the inflation data shows underlying inflation a bit firmer in the last months of 2015 than previously reported.

Following the strong core CPI reading, the Fed's preferred personal consumption expenditures (PCE) price index (data next Friday), excluding food and energy, is now expected to increase 0.2 percent in Jan after slipping 0.1 percent in Dec. The core PCE is forecast rising 1.6 percent in the 12 months through Jan after increasing 1.4 percent in Dec.

"While the market remains concerned about another US recession, underlying price pressures continue to build up. Inflation numbers support the case for further rate hikes by the Fed, even if March comes too early, and leaves the market vulnerable for another repricing of the Fed outlook, though not quite yet." said Nordea Bank.