Central bankers are breathing a collective sigh of relief as consumer prices hit a four-year high. The U.S. consumer-price index (CPI) beat expectations this morning hitting 0.6 percent in January, the Bureau of Labor Statistics said on Wednesday. It was the fastest pace of growth since February 2013. The news is a welcome relief to Federal Reserve officials, who have been fighting to generate benign inflation since the end of the financial crisis. Year-on-year inflation hit 2.5 percent, the biggest gain since March 2012. 

Increases in gasoline, new car sales and apparel prices pushed inflation well into the comfort zone of policy officials and will further bolster Fed Chair Janet Yellen's comments yesterday that gradual rate hikes in 2017 will be necessary. (See also: Yellen Sees More Rate Hikes With Economic Growth.)

Global Trend on the Mend

Since 2011, central banks have kept monetary policy accommodative in an attempt to stave off deflation and many have entering the unchartered waters of negative rates. However, today's U.S. data is part of a continuing trend around the world that deflation may be a dead duck. On Tuesday, China producer prices hit a five-year high, increasing 6.9 percent in the month of January on the back of mining and commodity price gains. (See also: China January Inflation Data Higher.)

In Europe, the post-Brexit​ economic fears have stabilized for the time being and the fall in the British Pound has helped drag the economy away from low inflation. On Tuesday, the U.K. Office of National Statistics (ONS) said consumer prices rose 1.8 percent in January, the fastest pace since June 2014 and the fourth consecutive increase. 

The one outlier continues to be Japan. A wave of stimulus and unconventional policy, including pegging the 10-year government yield has not had the effect the Bank of Japan had hoped for. Japan spent the majority of 2016 in deflation, with prices falling by as much as 0.5 percent month-on-month. Last month, the Japanese economy crept out of the deflation zone with December inflation at 0.3 percent. However, this is well short of the BoJ's target of 2 percent. 

U.S. Fed on Alert

Today's inflation report has seen fed funds futures increase the probability of a rate hike in March. CME FedWatch data is now pricing in a 22.1 percent chance of a hike, up from 17.7 percent yesterday. With price stability returning to the U.S. economy, the Fed now has all three key objectives under control (the other two being full employment and financial stability). (See also: Goals and Targets of the U.S. Federal Reserve.)

Rhetoric from key members of the Federal Reserve suggest a faster-than-expected rise in interest rates may be in play. On Tuesday, President of the Federal Reserve Bank of Richmond Jeffrey Lacker said current financial conditions are not in sync with yields this low. "Taking the range of plausible alternatives into account, my view is that, with unemployment at or below levels corresponding to maximum sustainable employment and with inflation very close to our announced target of 2 percent, significantly higher rates are warranted," said Lacker. 

Adding to the hawkish rhetoric, President of the Federal Reserve Bank of Boston Eric Rosengren added that the economy could be at risk of overheating with rates at such low levels, saying rates could increase “even a bit more rapidly than that forecast."

Should the Federal Reserve begin to raise interest rates faster than the market is pricing in, it will create some tensions on Capitol Hill. A more rapid pace of hikes will likely result in dollar appreciation, something that would rile President Donald Trump. Trump has long criticized other nations for undervaluing their currencies to benefit trade. Most notably he has attacked Asian central banks. "You look at what China's doing, you look at what Japan has done over the years. They play the money market, they play the devaluation market and we sit there like a bunch of dummies," Trump said in a meeting with pharmaceutical executives in early February. 

The U.S. dollar is trading at multi-year highs against the Chinese Yuan

The bottom line

After years of unconventional monetary policy, this generation of central bankers may have a new task at hand: how to exit accommodative policies. Whether central banks choose to sell assets from their balance sheets, let them mature or adopt some other approach of tightening policy, we will surely be finding out sooner than expected.