The U.S. Consumer Price Index (CPI) data came in stronger at 2.3% annualized over the last three months. After a little weakness to end 2016, inflation has crossed back over 2.0% and early indications are that it will persist over the remainder of the year. At this point, inflation is largely in-line with expectations.
Current predictions suggest that CPI will average out somewhere between 2.2-2.5% for 2017. Core CPI, which excludes energy and food, started off particularly strong in areas such as furnishing and retail. If inflation maintains at these levels, it will give the Federal Reserve flexibility in determining policy for increasing the federal funds rate. Their current plan is to gently increase rates in 0.25% increments a few times in 2017. If inflation rises faster than expected it could force them to raise rates faster.
Bond prices so far have largely reflected the expected increase in rates with the majority of their move coming in the fourth quarter of last year. If inflation maintains at this level, yields should more than offset the movements in price. If we see an increase in inflation or growth expectations bond prices could fall but with global yields remaining so low, there is a floor to how far they can go.