Inflation in the US reaches its highest level in 39 years at 7%, setting the stage for Fed increases

U.S. consumer prices rose last year with the highest in nearly four decades, illustrating a red-hot inflation that sets the stage for the start of Federal Reserve rate hikes as early as March.

The consumer price index rose 7 percent in 2021, the largest increase in 12 months since June 1982, according to data from the Department of Labor released Wednesday. The widely followed inflation meter rose 0.5 percent from November, exceeding forecasts.

Inflation in the US reaches its highest level in 39 years at 7%, setting the stage for Fed increases

Leaving aside the volatile food and energy components, the so-called core prices accelerated from a month earlier and rose by 0.6 per cent. larger than expected. The measure rose 5.5 percent from a year earlier, the largest progress since 1991.

The increase in CPI was driven by higher prices for shelter and used vehicles. Food expenses also contributed. Energy prices, which were a major driver of inflation through most of 2021, fell last month.

The data reinforces expectations that the Fed will start raising interest rates in March, a sharp political adjustment from the timeline projected just a few months ago. High inflation has proven to be more stubborn and widespread than the central bank predicted in the midst of unprecedented demand for goods, along with capacity constraints related to the supply of both labor and materials.

Meanwhile, unemployment has now fallen to below 4 per cent. Against this background, some Fed policy makers have said it might be appropriate to start shrinking the central bank’s balance sheet shortly after raising interest rates.

Market expectations for Fed tightening, expected in March and 2022 as a whole, were broadly unchanged after the report. Yields on 10-year government bonds remained lower with the dollar, while the S&P 500 opened higher.

“As for where the Fed is on their dual mandate – inflation and the labor market – they are basically there,” Michael Gapen, chief economist at Barclays Plc, told Bloomberg Television. “I do not really think there is anything stopping them from going in March, except for one of those deviant events. I think they are ready.”

The energy index fell 0.4 percent from November, the first monthly decline since April, when gasoline prices fell. Food inflation rose 0.5 percent, a slight slowdown from the previous month due to falling meat costs.

“What we have now is a mismatch between demand and supply. We have very strong demand in areas where supply is limited, especially around goods, especially around things like cars, Fed Chairman Jerome Powell said Tuesday to the Senate Banking Committee.

Companies are desperate to fill vacancies and increase wages to attract and retain workers, especially at the lower end. But rising prices erode these wage advances. The inflation-adjusted average hourly wage fell 2.4 percent in December from a year earlier, the biggest drop since May, separate data showed Wednesday. Compared to a month earlier, however, they rose 0.1 per cent, the first increase in three months.

What Bloomberg Economics says …

“CPI for December showed strong demand and supply bottlenecks still at stake, with commodity inflation driven by car and clothing prices. A decline in service prices could prove misleading, with the cost of shelter being a growing source of upward pressure in 2022 . “

– Andrew Husby and Yelena Shulyatyeva, economists

Housing costs – which are considered to be a more structural component of the CPI and account for about a third of the total index – rose 0.4 per cent on the previous month. Other meters for house prices and rents have risen last year, which probably presupposes a sharp acceleration in the report’s house measurements this year and offers a sustained tailwind to inflation.

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Omicron – the dominant COVID-19 variant in the US – is ready to further disrupt already fragile supply chains as quarantine and illness prevent some employees from going to work. Expenditure on services such as travel may slow down and push prices down, but commodity prices may move higher.

Nevertheless, the impact is expected to be temporary. Economists expect CPI growth to slow to around 3 per cent. during 2022, which will depend on the normalization of supply chains and equalization of energy prices. Higher rents, robust wage growth, subsequent waves of COVID-19 and persistent supply constraints all pose upward risks to the inflation outlook.

The persistently high inflation is also likely to maintain a high obstacle for President Joe Biden and the Democrats to revive their $ 2 trillion tax and spending package after a central lawmaker, West Virginia Senator Joe Manchin, objected to the legislation in part because of the price increase.

On a December-December basis, the rise in the CPI was the largest progress since 1981.

The inflation environment changed markedly in 2021 compared with the previous year, when a pandemic-related slowdown in demand led to the smallest calendar year increase in the consumer price index since 2015.

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