Consumer prices in the United States soared last year to their highest level in almost four decades, illustrating a red-hot inflationthat prepares the scenario for the beginning of interest rate hikes by the Federal Reserve (Fed) as of March. The consumer price index rose 7 percent in 2021, the largest increase in 12 months since June 1982, according to data from the Department of Labor published this Wednesday. The widely followed inflation gauge rose 0.5 percent from November, beating forecasts. Excluding the volatile components of food and energy, the so-called core prices accelerated from the previous month, increasing 0.6 percent more than expected. The measure jumped 5.5 percent from the previous year, the biggest advance since 1991.
The increase in the CPI was led by higher housing and used vehicle prices. Costs of food also contributed. Energy prices, which were a key driver of inflation for most of 2021, fell last month. The data reinforces expectations that the Fed will start raising interest rates in March, a sharp policy adjustment from the projected timeline just a few months ago. High inflation has proven to be more stubborn and widespread than the central bank predicted amid unprecedented demand for goods coupled with capacity constraints related to the supply of labor and materials. Meanwhile, the unemployment rate has now fallen below 4 percent. In this evolving context, some Fed policymakers have said it might be appropriate to start cutting the central bank’s balance sheet soon after raising rates.Reaction market to inflation data The market expectations for the expected Fed tightening in March and 2022 as a whole were largely unchanged after the report. 10-year Treasury yields fluctuated as S&P 500 futures held gains and the dollar extended its decline on the day.
“In terms of where the Fed is in its dual mandate, inflation and the labor market, they’re basically there,” Michael Gapen, chief US economist at Barclays, told Bloomberg Television. “I really don’t think anything is going to stop them in March except one of these outliers. I think they are ready”. The energy index fell 0.4 percent from November, the first monthly drop since April due to lower gasoline prices. Food inflation rose 0.5 percent, a slight slowdown from the previous month due to falling meat costs. “What we have now is a mismatch between demand and supply. We have very strong demand in areas where supply is constrained, particularly in goods, particularly things like automobiles,” Fed Chairman Jerome Powell told the Senate Banking Committee on Tuesday. Desperate to fill vacant positions,companies are raising wages to attract and retain workers, particularly at the lower end. But rising prices are eroding those wage gains. Inflation-adjusted average hourly earnings fell 2.4 percent in December from a year earlier, the biggest drop since May, separate data showed on Wednesday. However, compared to a month earlier, they were up 0.1 percent, the first gain in three months. The housing costs, which are considered a more structural component of the CPI and represent about a third of the general index, increased 0.4 percent from the previous month. Other indicators of home prices and rents rose last year, likely heralding a sharp acceleration in the report’s housing metrics this year and providing a lasting tailwind to inflation. Ómicron, the dominant variant of COVID-19 in the US, is poised to further disrupt already fragile supply chains as quarantines and illness prevent some employees from going to to work. Spending on services such as travel may slow down, driving prices down, but prices for goods may rise. However, the impact is expected to be temporary. While economists expect CPI growth to moderate to around 3 percent over the course of 2022, higher incomes, strong wage growth, subsequent waves of COVID-19, and lingering supply constraints pose upside risks to the inflation outlook.The inflation environment changed markedly in 2021 compared to the previous year, when a pandemic-related slowdown in demand led to the CPI’s smallest annual gain since 2015.Note: This article have been indexed to our site. We do not claim legitimacy, ownership or copyright of any of the content above. To see the article at original source Click Here
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