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U.S. consumer prices post largest gain in nearly 40 years; inflation close to peaking

U.S. consumer prices post largest gain in nearly 40 years; inflation close to peaking
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  • Consumer prices rose 0.5% in December
  • CPI rose 7.0% year-on-year
  • Core CPI rose 0.6%; Advance 5.5% YoY

WASHINGTON (Reuters) – U.S. consumer prices rose strongly in December, as rental accommodation and used cars maintained solid gains, culminating in the biggest annual rise in inflation in nearly four decades, bolstering expectations that the Federal Reserve will start raising rates. Rates early in March.

The report released by the Department of Labor on Wednesday followed data released last Friday that showed the labor market is at or near the maximum employment limit. Federal Reserve Chairman Jerome Powell said Tuesday that the US central bank stands ready to do what is necessary to prevent high inflation from becoming “entrenched,” in testimony during his nomination hearing before the Senate Banking Committee for a second four-year term as Chairman. . Bank. Read more

The rising cost of living, as a result of supply chains faltering due to the COVID-19 pandemic, is a political nightmare for President Joe Biden, whose popularity has taken a hit.

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“The Fed will have to start raising rates in March and depending on the political pressure on them — from both sides of the aisle — they will have to raise rates four or more times this year and possibly more next year,” said Chris Zacarelli, chief executive officer. Invest in the Independent Advisor Alliance in Charlotte, North Carolina.

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, although the 0.5% increase in food prices was lower than in the previous three months. There have been big gains in fruit and vegetable prices, but beef prices are down 2.0% after recent sharp gains.

Consumers also took a reprieve from gasoline prices, which fell 0.5% after rising 6.1% in November and October.

In the twelve months through December, the CPI rose 7.0%. That was the largest year-over-year increase since June 1982 and was followed by a 6.8% rise in November.

Economists polled by Reuters had expected the CPI to rise 0.4% and rise 7.0% year-on-year.

Inflation is well above the Fed’s flexible 2% target. It is also being lifted by wage pressures arising as the labor market tightens. The unemployment rate fell to a 22-month low of 3.9% in December. Money markets are currently assigning about 85% of the odds of a rate hike by March. FEDWATCH

Economists say the broad nature of inflation appears to have caught Fed officials by surprise. There are fears that inflation expectations will become entrenched and force the Federal Reserve to tighten monetary policy aggressively, which could cause a recession.

“This is the first time that the Fed has gone after rather than trying to preempt inflation that hasn’t existed since the 1980s,” said Diane Sonk, chief economist at Grant Thornton in Chicago. “Prepare yourselves.”

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

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Rising inflation is also eroding wage gains. Average weekly inflation-adjusted earnings fell 2.3% year over year in December.

Economists believe the year-over-year CPI peaked in December or is likely to do so by March. There are signs that supply bottlenecks are starting to ease, with a survey by the Institute for Supply Management last week showing manufacturers reporting an improvement in supplier deliveries in December.

But the increased COVID-19 cases, driven by the Omicron variant, could slow progress toward normalizing supply chains.

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

The so-called base CPI was boosted by rents, with owners’ equivalent rent for primary housing, which a homeowner would receive from renting a home, rising 0.4% for the third month in a row.

Used car and truck prices accelerated 3.5% after increasing 2.5% in each of the previous two months. This rise likely reflects Hurricane Ida in late August and early September, which destroyed thousands of cars among other properties.

New car prices rose 1.0%, marking the ninth consecutive month of gain. The global shortage of semiconductors has dampened automobile production.

Furniture, furnishings and housekeeping supplies went up in price. Clothing prices jumped 1.7%, the largest increase since January 2021. The cost of health care rose 0.3%.

There have also been increases in the prices of airline tickets, personal care products and tobacco. But the cost of auto insurance has fallen again, as has entertainment. Communication prices have not changed.

In the twelve months through December, the so-called core CPI accelerated by 5.5%. This was the biggest year-over-year gain since February 1991 and followed a 4.9% advance in November. The core CPI rate is expected to peak on an annual basis in February.

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

“Inflation will slow in 2022 as supply chains reopen and prices for some items, such as cars and energy, fall, as supply catches up with demand,” said Jos Foucher, chief economist at BNC Financial in Pittsburgh, Pennsylvania.

“But inflation in many other goods and services will be higher in 2022 than it was 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 Mutikani) Editing by Chizu Nomiyama and Andrea Ricci

Our Standards: Thomson Reuters Trust Principles.

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