US consumer prices rise at the fastest rate in nearly 40 years

U.S. consumer prices soared last year by the most in nearly four decades, sapping the purchasing power of American families and setting the stage for the Federal Reserve to begin hiking interest rates as soon as March.

The consumer price index climbed 7% in 2021, the largest 12-month gain since June 1982, according to Labor Department data released Wednesday. The widely followed inflation gauge rose 0.5% from November, exceeding forecasts.

Strong demand and scarce supply for key items such as cars are driving the increases, which are putting pressure on policymakers to act. The US central bank is expected to raise interest rates this year.
The rise in borrowing costs is aimed at reducing demand by making purchases such as cars more expensive.

Excluding the volatile food and energy components, so-called core prices accelerated from a month earlier, rising by a larger-than-forecast 0.6%. The measure jumped 5.5% from a year earlier, the biggest advance since 1991.

The increase in the CPI was led by higher prices for shelter and used vehicles. Food costs also contributed. Energy prices, which were a key driver of inflation through most of 2021, fell last month.

December’s increase marked the third month in a row that the US annual inflation rate has hovered above 6% – well north of policymakers’ 2% target. The last time the pace of inflation exceeded that level was in 1982.

Housing costs were up 4.1% year-on-year, while the cost of groceries rose 6.5% – compared to a 1.5% annual average over the last 10 years.

Wednesday’s report from the Labor Department showed signs that some of the pressures may be easing.

The cost of energy dropped 0.4% from November to December – its first decline since April. But over 12 months energy costs are up by nearly 30% and have returned to their upward trend in recent days

Market expectations for Fed tightening expected in March and 2022 as a whole were largely unchanged after the report. Yields on 10-year Treasuries fluctuated while S&P 500 futures maintained gains and the dollar extended its decline on the day.

“In terms of where the Fed is on their dual mandate — inflation and the labor market –, they’re basically there,” Michael Gapen, chief U.S. economist at Barclays Plc, said on Bloomberg Television. “I don’t really think anything stops them going in March except one of these kinds of outlier events. I think they’re ready.” 

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