Daily Management Review

US December Consumer Price Inflation Mark Biggest Rise In Almost 40 Years


US December Consumer Price Inflation Mark Biggest Rise In Almost 40 Years
The largest annual rise in inflation in almost four decades occurred in December, in the United States as rental housing and used cars held onto their strong gains, resulting in inflation. This has bolstered expectations that the US Federal Reserve will begin hiking interest rates as soon as March.
The Job Department's report came in the wake of data released last Friday that showed the labor market was at or near full employment.
In testimony before the Senate Banking Committee on Tuesday, Fed Chair Jerome Powell said the bank was ready to do whatever it took to keep high inflation from getting "entrenched." Powell is seeking re-election to a second four-year term as the bank's chairman.
The high cost of living, the result of snarled supply chains because of 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 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.
After increasing by 0.8 per cent in November, the consumer price index increased by 0.5 per cent last month. Consumers coughed up more for food in addition to increased rents, though the 0.5 per cent increase was less than in the previous three months. Fruit and vegetable prices rose significantly, although meat prices declined by 2.0 per cent after recent high increases.
Consumers also received a break from growing gasoline costs, which dipped 0.5 per cent in December after jumping 6.1 per cent in November and October.
The CPI increased by 7.0 per cent in the year ending in December. Following a 6.8 per cent gain in November, this was the largest year-over-year increase since June 1982.
The inflation readings from last month were in line with predictions. Inflation is hurting wage gains as well.
In December, inflation-adjusted average weekly wages declined 2.3 per cent year over year.
As the global economy recovers from the pandemic, President Biden stated practically every country is experiencing inflation.
"This report underscores 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 significantly above the Fed's accommodative objective of 2 per cent. As the labor market tightens, it is also being boosted by emerging wage pressures. In December, the jobless rate hit a 22-month low of 3.9 per cent. According to CME's FedWatch tool, markets have priced in an 80% chance of a rate hike in March.
According to economists, the Fed officials were caught off guard by the broad extent of inflation. There are fears that inflation expectations may become entrenched, forcing the Fed to tighten monetary policy aggressively, potentially triggering 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."