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US consumer prices rose solidly in December, with the annual increase in inflation the largest in nearly four decades, which could bolster expectations that the Federal Reserve will start raising interest rates as early as March.
The consumer price index increased 0.5% last month after advancing 0.8% in November, the Labour Department said on Wednesday.
In the 12 months through December, the CPI surged 7.0%.
That was the biggest year-on-year increase since June 1982 and followed a 6.8% rise in November.
Economists polled by Reuters had forecast the CPI gaining 0.4% and shooting up 7.0% on a year-on-year basis.
The economy is experiencing high inflation as the COVID-19 pandemic snarls supply chains.
The high cost of living is weighing on President Joe Biden’s approval rating.
Inflation is well above the Fed’s 2% target and is also being lifted by budding wage pressures.
The government reported last Friday that the unemployment rate dropped to a 22-month low of 3.9% in December, suggesting that the labour market is at or near maximum employment.
Fed Chair Jerome Powell on Tuesday said the US central bank stood ready to do what was necessary to keep high inflation from becoming “entrenched,” in testimony during his nomination hearing before the Senate Banking Committee for a second four-year term as head of the bank.
“If we started to see measurable improvement in the supply chain such that it really reduced the price pressures, that does take some pressure off the Fed or it just helps them get from here to there with fewer rate hikes in the short term,” said Greg McBride, Bank rate.com’s chief financial analyst.
“However, the supply chain issues have been around a lot longer than we thought it was going to be. It still is as present as it ever was. And progress is slow. Even the Omicron variant has kind of introduced a new wrinkle. A lot of the factories in Asia that in the initial stages of supply chain issues had been shut down and had more recently gotten up and running in late 2021, you’re already starting to see some renewed shutdowns at some of those factories and manufacturing facilities in Asia because of the Omicron variant. All that does is kind of feed through yet another wave of supply chain disruptions. So, this is something we’re going to contend with through much, if not all, of 2022.”
Money markets currently price about 85% odds of an interest rate hike by March, and a total of at least three quarter-point hikes by year-end.
Economists believe the year-on-year CPI rate probably peaked in December or will likely do so by March.
There are signs that supply bottlenecks are starting to ease, with an Institute for Supply Management survey last week showing manufacturers reporting improved supplier deliveries in December.
But soaring COVID-19 cases, driven by the Omicron variant, could slow progress towards normalization of supply chains.
“People often conflate that peak inflation or inflation receding with prices falling,” said McBride.
“No, that just means they’re not going to increase as fast. But make no mistake, they’re still going to increase and they’re going to increase at a faster rate than what we’ve become accustomed to. So, peak inflation to households that are trying to struggle to stretch their dollars, that is a meaningless term because the reality of it is we are still going to see prices going up and for millions of households, prices going up faster than their wages can keep up.”
Excluding the volatile food and energy components, the CPI increased 0.6% last month after rising 0.5% in November.
In the 12 months through December, the so-called core CPI accelerated 5.5%.
That was the largest year-on-year gain since February 1991 and followed a 4.9% advance in November.
Core inflation is being driven by rising prices for services such as rentals, as well scarce goods like motor vehicles.
The year-on-year core CPI rate is seen peaking in February.