With a closed watched Labor Department gauge released last week , inflation accelerated to its fastest 12-month rate in nearly 40 years in December.
According to the Department of Labor’s Bureau of Labor Statistics, the consumer price index, a metric that measures costs across dozens of items, increased by 7%. CPI increased by 0.5 percent on a monthly basis.
Dow Jones surveyed economists, who predicted the index would rise 7% year on year and 0.4 percent from November.
The annual increase was the fastest since June 1982, and it comes amid a shortage of goods and workers, as well as unprecedented cash flowing into the US economy from Congress and the Federal Reserve.
Despite the large gain, stocks rose following the announcement, while government bond yields were mostly negative.
“The December CPI report of a 7% increase over the last year will be shocking for some investors because we haven’t seen a number that high” in nearly 40 years, according to Brian Price, head of investment management at Commonwealth Financial Network. “However, many expected this print, and we can see that reaction in the bond market as longer-term interest rates have fallen so far this morning.”
Excluding food and energy prices, the so-called core CPI rose 5.5 percent year on year and 0.6 percent month on month. This compares to estimates of 5.4 percent and 0.5 percent, respectively. It was the largest annual increase in core inflation since February 1991.
Shelter costs, which account for nearly one-third of total spending, increased 0.4 percent month over month and 4.1 percent year over year. This was the quickest rate since February 2007.
Used vehicle prices rose another 3.5 percent in December, bringing the year-on-year increase to 37.3 percent due to supply chain constraints that limited new vehicle production during the Covid pandemic.
In contrast, energy prices fell 0.4 percent for the month, with fuel oil falling 2.4 percent and gasoline falling 0.5 percent. Nonetheless, the complex as a whole rose 29.3 percent in a year, with gasoline rising 49.6 percent.
Fed officials are closely monitoring inflation data and are widely expected to raise interest rates this year in an effort to combat rising prices and as the labor market approaches full employment. Though the central bank’s primary inflation measure is the personal consumption expenditures price index, policymakers consider a wide range of information when making decisions.
“This morning’s CPI reading really only confirms what we already know: consumer wallets are feeling pricing pressures, and the Fed has signaled a more hawkish stance.” But it remains to be seen whether the Fed will pick up the pace, given that inflation appears to be here to stay, at least in the medium term,” said Mike Loewengart, managing director of investment strategy at E-Trade. “As the number of Covid cases continues to rise, the impact on the supply chain and labor shortages may persist, fueling higher prices.”
Inflation has eaten away at otherwise significant wage gains for workers. The 0.6 percent total gain outweighed the 0.5 percent CPI headline increase, resulting in a 0.1 percent increase in real average hourly earnings for the month. Real earnings have increased year on year.
Fed officials attribute rising inflation pressures primarily to pandemic-specific issues, such as clogged supply chains and empty store shelves. Though there are signs that omicron variant cases will peak soon, lingering Covid issues combined with cold weather in the Northeast point to “renewal of upward pressure on food prices,” according to Paul Ashworth, Capital Economics’ chief U.S. economist.
Food prices rose 0.5 percent in December and 6.3 percent year on year, the largest increase since October 2008.
The Fed is widely expected to begin raising interest rates in March, according to investors. Fed Chairman Jerome Powell did not provide any specific dates during his confirmation hearing before the Senate Banking Committee on Tuesday, but he did acknowledge that as long as current conditions persist,
According to the CME’s FedWatch Tool, markets are pricing in a nearly 79 percent chance of the first quarter-percentage-point increase in May, and a roughly 50 percent chance of the Fed enacting four such hikes in 2022.
