US consumer prices post biggest increase in nearly 40 years; inflation close to the top

  • Consumer prices rise 0.5% in December
  • CPI rises by 7.0% year-on-year
  • Core CPI rises 0.6%; advances 5.5% year-on-year

WASHINGTON, Jan. 12 (Reuters) – U.S. consumer prices rose sharply in December as rental housing and used cars maintained their strong growth, culminating in the largest annual rise in inflation in nearly four decades, boosting expectations that the Federal Reserve will begin to raise interest rates already in March.

The report from the Ministry of Labor on Wednesday followed in the heels of data last Friday showing that the labor market was at or close to maximum employment.

Fed Chairman Jerome Powell said on Tuesday that the US Federal Reserve was ready to do what was necessary to prevent high inflation from being “fixed”, as testified during his nomination hearing in the Senate Banking Committee for another four-year term as head of the US Federal Reserve. bank. Read more

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The high cost of living, the result of constricted supply chains due to the COVID-19 pandemic, is a political nightmare for President Joe Biden, whose approval rating has been a hit.

“The Fed will be forced to start raising interest rates in March, and depending on the political pressure on them – from both sides at a time – they will have to raise interest rates four or more times this year and potentially more than that. , “said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance in Charlotte, North Carolina.

The consumer price index rose 0.5% last month after rising 0.8% in November. In addition to higher rents, consumers also paid more for food, although the 0.5% increase in food prices was smaller than in the previous three months. There were large increases in fruit and vegetable prices, but beef prices fell 2.0% after the recent sharp rises.

Consumers also got a respite from petrol prices, which fell 0.5% after rising 6.1% in both November and October.

In the 12 months to December, the CPI rose 7.0%. It was the largest year-on-year increase since June 1982, following a 6.8% increase in November.

Last month’s inflation measurements were in line with expectations. Rising inflation is also eroding wage increases. Inflation-adjusted average weekly earnings fell 2.3% year-on-year in December.

President Biden said that virtually all nations were affected by inflation as the global economy recovers from the pandemic.

“This report underscores that we still have more work to do, with price increases still too high and squeezing family budgets,” Biden said in a statement.

Inflation is well above the Fed’s flexible 2% target. It is also lifted by burgeoning wage pressures as the labor market tightens. Unemployment fell to a 22-month low of 3.9% in December. Markets have priced around 80% for an interest rate hike in March, according to CME’s FedWatch tool.

Economists say the broad nature of inflation appears to have taken Fed officials by surprise. There are concerns that inflation expectations could become entrenched, forcing the Fed to aggressively tighten monetary policy, potentially causing a recession.

“This is the first time the Fed has been hunting instead of trying to anticipate non-existent inflation since the 1980s,” said Diane Swonk, chief economist at Grant Thornton in Chicago. “Stand up.”

Shoppers are looking at a home-based hardware store while wearing masks to help slow the spread of coronavirus (COVID-19) disease in northern St. Louis. Louis, Missouri, USA April 4, 2020. Photo taken April 4, 2020. REUTERS / Lawrence Bryant / File Photo / File Photo

Shares on Wall Street traded higher due to relief that the rise in prices was as expected. The dollar fell against a basket of currencies. US government bond prices rose.

Reuters graphics

RELAXATION OF BOTTLE TAILS

Economists believe that the year-on-year CPI rate is likely to peak in December or likely to do so in March. There are signs that supply bottlenecks are starting to ease, with a study by the Institute for Supply Management last week showing that manufacturers reported improved supplier deliveries in December.

But rising COVID-19 cases, driven by the Omicron variant, could slow progress toward normalization of supply chains.

Excluding the volatile food and energy components, the CPI rose 0.6% last month after rising 0.5% in November.

The so-called core CPI was boosted by the rent, where the owners’ corresponding rent of primary housing, which is what a homeowner would receive by renting a home, increased by a solid 0.4% for a third month in a row.

Used car and truck prices rose 3.5% after rising 2.5% in each of the previous two months. The rise is likely to reflect Hurricane Ida in late August and early September, which, among other things, destroyed thousands of motor vehicles.

Prices of new motor vehicles rose 1.0%, marking the ninth consecutive month of increases. A global shortage of semiconductors has underscored the production of motor vehicles.

Prices of furniture, bedding and household items rose. Clothing prices rose 1.7%, the largest increase since January 2021. Health care costs rose 0.3%.

There were also increases in the prices of airline tickets, personal care products and tobacco. But the cost of motor insurance fell again, as did recreation. Communication prices were unchanged.

In the 12 months to December, the so-called core CPI rose 5.5%. It was the largest year-on-year increase since February 1991 and followed a 4.9% increase in November. The year-on-year core CPI rate peaks in February.

Still, inflation is likely to remain above target this year.

“Inflation will decline in 2022 as supply chains reopen and prices of some commodities, such as vehicles and energy, fall as supply catches up with demand,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania.

“But inflation for many other goods and services will be higher in 2022 than before the pandemic due to higher labor costs and input prices. Housing will also contribute to high inflation in 2022.”

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Reporting by Lucia Mutikani; Edited by Chizu Nomiyama and Andrea Ricci

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