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US consumer prices have the largest increase in almost 40 years; inflation near the top

  • Consumer prices increase by 0.5% in December
  • The CPI increases by 7.0% from year to year
  • Core CPI rises 0.6%; increase 5.5% from year to year

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

The report from the Ministry of Labor on Wednesday followed in the footsteps of data last Friday which showed 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 “anchored”, in testimony during his nomination hearing for the Senate Banking Committee for a new four-year term as head of the US Federal Reserve. . bank. read more

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

“The Fed is going to be forced to start raising interest rates in March, and depending on the political pressure on them – from both sides of the aisle – they will have to raise interest rates four or more times this year and potentially more than next year. “said Chris Zaccarelli, Chief Investment Officer of 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 the previous three months. There were large increases in the prices of fruit and vegetables, but beef prices fell 2.0% after the last sharp rise.

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

During the 12 months to December, the CPI rose by 7.0%. It was the largest increase from year to year since June 1982 and followed an increase of 6.8% in November.

Last month’s inflation readings were in line with expectations. Rising inflation is also eroding wage growth. Inflation-adjusted average weekly income fell 2.3% on an annual basis in December.

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

“This report emphasizes 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. The markets have priced in a chance of around 80% for an interest rate increase in March, according to CME’s FedWatch tool.

Economists say the broad nature of inflation appears to have alerted Fed officials. There are concerns that inflation expectations could be anchored and force the Fed to tighten monetary policy aggressively, which could potentially cause a recession.

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

Shoppers surf in a store with building supplies in Home Depot while wearing masks to slow the spread of coronavirus (COVID-19) disease in North St. Louis, Missouri, USA April 4, 2020. Photo taken April 4, 2020. REUTERS / Lawrence Bryant / File Photo / File Photo

Shares on Wall Street traded higher amid relief that the price increase was as expected. The dollar fell against a basket of currencies. US government bond prices rose.

Reuters graphics


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

However, sky-high cases of COVID-19, driven by the Omicron variant, may slow the trend towards normalization 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 strengthened by rent, with the owners’ corresponding rent of primary housing, which is what a homeowner would get from renting a home, which rose by a solid 0.4% for the third month in a row.

Prices for used cars and trucks increased by 3.5% after increasing by 2.5% in each of the two previous months. The increase probably reflects Hurricane Ida in late August and early September, which destroyed thousands of motor vehicles, among other things.

The prices of new motor vehicles rose 1.0%, marking the ninth month in a row with an increase. A global shortage of semiconductors has undermined car production.

Prices of furniture, bedding and household items increased. Clothing prices rose by 1.7%, the largest increase since January 2021. Health costs rose by 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, and so did recreation. Communication prices were unchanged.

In the 12 months to December, the so-called core CPI accelerated 5.5%. It was the largest increase from year to year since February 1991, following a 4.9% increase in November. The year-on-year core CPI interest rate is seen at its peak in February.

Nevertheless, 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 investment 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

Our standards: Thomson Reuters Trust Principles.

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