Consumer prices in the United States rose steadily in December, with substantial rises in rental housing and used automobiles, resulting in the greatest annual increase in inflation in almost four decades, bolstering anticipation that the Federal Reserve may begin hiking interest rates as soon as March.
The Job Department’s report came on the heels of statistics released last week 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 avoid high inflation from getting “entrenched.” Powell is seeking re-election to a second four-year term as the bank’s chairman.
“The Fed will be obliged to start hiking rates in March, and depending on political pressure from both sides of the aisle, they may have to hike rates four or more times this year, and possibly more next year,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.
After rising 0.8 percent in November, the consumer price index rose 0.5 percent last month. Consumers paid more for food in addition to increased rents, albeit the 0.5 percent rise was lower than in prior months. After climbing 6.1 percent in November and October, gasoline prices dipped 0.5 percent in November.
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.
U.S. stocks opened higher amid relief that the rise in prices last month was in line with expectations. The dollar fell against a basket of currencies. U.S. Treasury prices rose.
INFLATION ABOVE TARGET
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.
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.
Excluding the volatile food and energy components, the CPI increased 0.6% last month after rising 0.5% in November.
The so-called core CPI was boosted by rents, with owners’ equivalent rent of primary residence, which is what a homeowner would receive from renting a home, rising a solid 0.4% for a third straight month.
Prices for used cars and trucks accelerated 3.5% after increasing 2.5% in each of the prior two months. The surge likely reflects Hurricane Ida, which destroyed thousands of motor vehicles among other property.
New motor vehicle prices rose 1.0%, marking the ninth consecutive month of gains. A global semiconductor shortage has undercut motor vehicle production.
Prices for household furnishings and operations rose 1.1%, while the apparel index jumped 1.7%, the largest increase since January 2021. The cost of healthcare rose 0.3%.
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. The year-on-year core CPI rate is seen peaking in February.