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Tuesday, January 18, 2022

Biggest rise in US consumer prices in nearly 40 years; inflation is at its peak

  • Consumer prices up 0.5% in December
  • CPI up 7.0% year-on-year
  • Core CPI up 0.6%; Advance 5.5% y-o-y

WASHINGTON, Jan 12 (Reuters) – US consumer prices rose solidly in December as rental housing and used cars maintained their strong gains, the biggest annual increase in inflation in nearly four decades, buoying expectations that The Federal Reserve will start raising interest rates in early March.

The Labor Department report on Wednesday showed the labor market was at or near maximum employment, based on data from last Friday. Fed Chairman Jerome Powell said Tuesday that the US central bank is ready to do what was needed to prevent high inflation from becoming “intrusive”, during a second four-year nomination hearing before the Senate Banking Committee. in a statement. Bank. read more

The high cost of living, a result of supply chains caused by the COVID-19 pandemic, is a political nightmare for President Joe Biden, whose approval ratings have taken a hit.

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“The Fed is going to be forced to raise rates in March and depending on political pressure on them – from both sides of the aisle – they will have to raise rates four or more times this year and potentially more next year,” North Chris Zacarelli, chief investment officer of the Independent Advisors Coalition in Charlotte, Carolina, said.

The consumer price index rose 0.5% last month after rising 0.8% in November. In addition to higher rents, consumers paid more for food, although the 0.5% increase in food prices was lower than in the previous three months. Fruit and vegetable prices made big gains, but beef prices fell by 2.0% after the recent sharp gains.

Consumers were also relieved by 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%. This was the biggest year-on-year increase since June 1982 and followed a 6.8% increase in November.

Economists polled by Reuters had forecast the CPI to rise 0.4% and shoot up 7.0% on a year-on-year basis.

Inflation is well above the Fed’s flexible 2% target. This is being lifted by the hardening of the labor market as well as budding wage pressures. The unemployment rate fell to a 22-month low of 3.9% in December. The money market currently puts the price at around 85% odds of an interest rate hike as of March. fedwatch

Economists say the broader nature of inflation has alarmed Fed officials. There are concerns that inflation expectations could tighten and force the Fed to aggressively tighten monetary policy, potentially leading to a recession.

“This is the first time the Fed has pursued a non-existent inflation since the 1980s, rather than trying to contain it,” said Diane Swonk, chief economist at Grant Thornton in Chicago. “Brace yourself.”

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Stocks on Wall Street were trading higher amid relief that price increases were in line with expectations. The dollar fell against a basket of currencies. US Treasury prices rose.

Reuters Graphics

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Rising inflation is also reducing wage benefits. Inflation-adjusted average weekly earnings fell 2.3% year-on-year in December.

Economists believe that the year-on-year CPI rate probably peaked in December or is likely to do so by March. There are signs that supply bottlenecks are beginning to ease, with last week’s Institute for Supply Management survey with manufacturers reporting better supplier deliveries in December.

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

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

The so-called core CPI was increased by rent, with rents equal to the owners’ primary residence, that a landlord would receive from renting a home, rising a solid 0.4% for the third straight month.

The prices of used cars and trucks increased by 3.5% after a 2.5% increase in each of the last two months. The increase likely reflects Hurricane Ida in late August and early September, which destroyed thousands of motor vehicles, among other assets.

New motor vehicle prices rose 1.0%, marking the ninth consecutive month of profit. A global semiconductor shortage has curtailed automotive production.

The prices of furniture, bedding and housekeeping supplies increased. Apparel prices rose 1.7%, the biggest increase since January 2021. Health care costs rose 0.3%.

There was also an increase in the prices of airline tickets, personal care products and tobacco. But the cost of motor vehicle insurance fell again, in the form of entertainment. Communication prices were unchanged.

In the 12 months to December, the so-called core CPI gained 5.5%. This was the biggest year-on-year gain since February 1991 and followed a 4.9% gain in November. The year-on-year core CPI rate has been seen to peak in February.

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

“Inflation will slow in 2022 as supply chains reopen and prices of some commodities like vehicles and energy will drop,” 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 higher inflation in 2022.”

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Reporting by Lucia Muticani; Editing by Chizu Nomiyama and Andrea Ricci

Our Standards: Thomson Reuters Trust Principles.


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