WASHINGTON: US consumer prices increased solidly in December as rental accommodation and used cars maintained their strong gains, culminating in the largest annual rise in inflation in nearly four decades, which bolstered expectations that the Federal Reserve will start raising interest rates as early as March.
The consumer price index rose 0.5% last month after advancing 0.8% in November. In addition to higher rents, consumers also paid more for food, though the 0.5% increase in food prices was less than in the prior three months. There were big gains in the prices of fruits and vegetables, but beef prices fell 2.0% after recent sharp gains.
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 through December, the CPI surged 7.0%. That was the biggest year-on-year increase since June 1982 and followed a 6.8% rise in November.
Economists polled by Reuters had forecast the CPI gaining 0.4% and shooting up 7.0% on a year-on-year basis.
US President Joe Biden admitted that his administration still had “more work to do with price increases still too high” even as he stated that there was progress made in slowing the rate of price increases.
His statement was released by the White House after US consumer prices increased solidly in December.
“We are making progress in slowing the rate of price increases. At the same time, this report underscores that we still have more work to do, with price increases still too high and squeezing family budgets,” Biden said.
The report from the Labor Department yesterday followed on the heels of data last Friday showing that the labour market was at or near maximum employment. Fed chair Jerome Powell on Tuesday said the US central bank stood ready to do what was necessary to keep high inflation from becoming “entrenched,“ in testimony during his nomination hearing before the Senate Banking Committee for a second four-year term as head of the bank.
The high cost of living, the result of snarled supply chains because of the Covid-19 pandemic, is a political nightmare for Biden, whose approval rating has taken a hit.
“The Fed is going to be forced to begin raising rates in March and depending on the political pressure on them – from both sides of the aisle – they are going to have to raise rates four or more times in this year and potentially more than that next year,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina.
Inflation is well above the Fed's flexible 2% target. It is also being lifted by budding wage pressures as the labour market tightens. The unemployment rate fell to a 22-month low of 3.9% in December. Money markets currently price about 85% odds of an interest rate increase by March.
Economists say the broad nature of inflation appears to have caught Fed officials off guard. There are concerns that inflation expectations could become entrenched and compel the Fed to aggressively tighten monetary policy, potentially causing a recession.
“This is the first time the Fed has chased instead of trying to preempt a nonexistent inflation since the 1980s,” said Diane Swonk, chief economist at Grant Thornton in Chicago. “Brace yourselves.”
Rising inflation is also eroding wage gains. Inflation-adjusted average weekly earnings fell 2.3% on a year-on-year basis in December.
Economists believe the year-on-year CPI rate probably peaked in December or will likely do so by March. There are signs that supply bottlenecks are starting to ease, with an Institute for Supply Management survey last week showing manufacturers reporting improved supplier deliveries in December.
But soaring Covid-19 cases, driven by the Omicron variant, could slow progress towards normalisation of supply chains.
Excluding the volatile food and energy components, the CPI increased 0.6% last month after rising 0.5% in November.
The so-called core CPI was boosted by rents, with owners' equivalent rent of primary residence, which is what a homeowner would receive from renting a home, rising a solid 0.4% for a third straight month.
In the 12 months through December, the so-called core CPI accelerated 5.5%. That was the largest year-on-year gain since February 1991 and followed a 4.9% advance in November. The year-on-year core CPI rate is seen peaking in February.
Still, inflation is likely to remain above target this year. – Reuters
Source: The Sun Daily
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