CPI data published today: Inflation may peak in 40 years

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Inflation in December was likely to rise at the fastest annual pace in four decades as consumer prices continued to rise, increasing pressure on the Federal Reserve to act quickly to tighten monetary policy before high prices set.

Economists predict a 7% year-on-year increase in the consumer price index in December, an increase from the November 6.8% rate that was already fastest annual pace since the early 1980s. The consensus expectation is that the pace of price increases declined during the month, however, from a pace of 0.8% in November to 0.4% in December. The Ministry of Labor will publish the December data on Wednesday at 8.30

The core CPI, which excludes the volatile food and energy sectors, is expected to rise 5.4% during the year in December, above the November annual rate of 4.9%.

The latest release comes as Fed Chairman Jerome Powell testified at Capitol Hill on Tuesday that he expects inflationary pressures to last well into the middle of this year and promised to use the central bank’s tools – including raising interest rates – to curb rising prices. While Powell gave few clues as to the timing of the first rate hike, some of his colleagues have already suggested that a rise in March is on the table. That would bring the first rate hike in line with the end of the Fed’s asset stimulus program, which was launched for the pandemic and will end in March.

Another warm inflation measurement, as expected, would only strengthen the argument for earlier and faster action. “If we see inflation continue at higher levels longer than expected, if we have to raise interest rates more over time, we will,” Powell said Tuesday.

Strong inflation figures would also increase expectations that the central bank could combine interest rate hikes with quantitative easing.when the Fed begins to shrink its $ 9 trillion balance sheet– already once this year. Economists with GDP Paribas this week shifted their expectations for quantitative easing to begin in July, from 2023 earlier.

A key area to keep an eye on in the December data will be how broadly based price pressure is, which will indicate how far inflation has spread across a few major pandemic-hit sectors that started driving up costs in the beginning of last year.

Economists expect the report to show inflationary pressures spanning a range of categories. Goods such as clothing, for example, were caught by problems with congestion of ports during the holidays, which probably pushed prices upwards. Auction data shows that the price of used cars continues to rise. Gas prices, which were expected to trend downwards, remained fairly flat during the month.

And perhaps the most worrying thing about the economy is that rents and rental costs are also expected to continue to rise. Higher costs that can keep core inflation high for several months, partly because rents can rise by a 12 to 18 month delay behind house prices. In addition, landlords are unlikely to bring the rent down again after they are increased.

“The more acceleration you see there, the more likely it is to be maintained,” said Paul Ashworth, chief economist for North America at Capital Economics.

A major remaining question for Wall Street and the central bank is now how long it may take for inflation to fall back closer to the Federal Reserve’s target of 2%, as determined by its preferred target, the personal spending price index. This issue is particularly prevalent as the Omicron variant rages, supply chain problems continue, consumer demand remains strong, and labor force participation rises at a slow pace.

“Nobody really expects inflation to stay at 7%,” says Ashworth. “The bigger question is whether it comes back to 2, and I think the answer is there is no chance of … at least this year, and probably next.”

Write to Megan Cassella at megan.cassella@dowjones.com