According to Bloomberg News, US consumer prices surged last year by a figure that was the highest in the last 40 years, manifesting the hottest inflation. This has paved the way for Federal Reserve’s first rate hike, which is expected to take place as early as March this year.
The consumer price index rose 7% in 2021, which was recorded as the largest gain since June 1982, which was revealed by the data released by the Labor Department on Wednesday. Exceeding the former, the inflation gauge rose by 0.5 in November%.
Leaving aside volatile components of food and energy, the core prices escalated from what it was one month earlier, surging by 0.6%, larger than what was the forecast—this measure escalated by 5.5% compared to one year earlier, which is the greatest advance since 1991.
There are anticipations that interest rates will begin to surge in March, a step that Fed will take, which is being seen as a policy adjustment, a projection timeline from a few months ago. In contrast to what the central bank predicted, high inflation has proved to be quite stubborn and widespread amidst demand for unprecedented goods coupled with constraints in the capacity related to material, labor, and supply.
Bloomberg News also reports that the rate of unemployment has dropped below 4%. While these changes are evolving, the Federal policymakers believe that this is the ideal time for beginning to shrink the central bank’s balance sheet immediately after there is a rise in rates.
Reaction in the market
Market expectations related to Federal tightening that is expected to take place in March 2022 soon after the report was released remained unchanged. 10-year Treasury yields oscillated while gains were maintained by S&P 500 futures, while the dollar extended its drop during the day.
The energy index dropped by 0.4% since November, the first-ever decline in a month since April with the price of gasoline sliding. Food inflation is surged by 0.5%, which is a slight drop from what it was in the last month which can be attributed to falling meat costs.
Bloomberg News reports that in a desperate move, to fill the open positions, business entities are increasing their payout to entice and retain workers, especially at the lower end. However, due to rising costs, wage advances are getting eroded. Inflation-adjusted hourly earnings on average, declined by 2.4% in December in comparison to one year earlier, which is being regarded as one of the biggest declines ever since May, as revealed in separate data on Wednesday. However, as compared to one month earlier, it surged by 0.1%, which was recorded as the first gain in 3 months.
Omicron, the new coronavirus variant, is anticipated to interrupt the already delicate state of the supply chain as social isolation in quarantine and sickness due to the same has kept workers from resuming work. Expenses on travel services may slow down, thereby pushing the costs down. However, the price of goods is expected to move higher up.
As such, the effect is expected to be just temporary. According to economists’ expectations, the CPI growth can be moderate to approximately 3% over 2022. Robust wage growth, higher rentals, and other Covid-19 waves and their persistent impact on supply chains, thereby posing upside risks, add to the higher inflation outlook.
