According to the Labor Department’s Wednesday release, inflation accelerated at its fastest pace for 12 months in almost 40 years during December.
According to the department, consumer prices index (a measure that compares costs for dozens of products) increased by 7%. Bureau of Labor Statistics. CPI rose 0.5% monthly.
Dow Jones polled economists who expected that the gauge would increase by 7% per year and 0.4% annually from November.
This year’s increase was the most rapid since June 1982. The move comes amid shortages of workers and goods, and follows unprecedented cash flows through the U.S. economic system from Congress (and the Federal Reserve).
Despite this strong gain stocks roseFollowing the news, yields on government bonds were mostly negative.
Brian Price of Commonwealth Financial Network’s investment management, commented that investors will find the December CPI Report of an increase of 7% over the past 12 months shocking. This is because we haven’t experienced a number like this in 40 years. However, many anticipated this print and it is evident that the bond market is reacting to this as longer-term rates of interest are falling this morning.
The core CPI, which excludes food and energy prices increased by 5.5% and 0.6% respectively year-over-year. This is compared to estimates of 0.5% and 5.4%. Core inflation saw the greatest annual growth rate since February 1991.
Shelter costs which account for nearly one third of total cost, rose by 0.4% and 4.1% respectively for the month. It was the fastest rate since February 2007.
The inflation rise in used vehicle prices has been driven by a large component of rising automobile prices. Covid pandemicSupply chain restrictions that limited the production of new vehicles in December caused a further 3.5% rise, taking it to 37.3%.
However, oil prices fell 0.4% for the month. Fuel oil dropped 2.4%, while gasoline declined 0.5%. The 12-month-long increase in complex prices was still 29.3%, with a 49.6% gain for gasoline.
Fed officials closely monitor inflation data and expect to increase interest rates in the coming year. This is in order to combat rising prices as well as ensure full employment. Although the primary measure of inflation used by the central bank is the personal consumption expenditures price indicator, the policymakers consider a variety of data when making their decisions.
“This morning’s CPI report only reinforces what we already knew: Prices are rising and consumers feel the pinch. The Fed, in turn, has taken a more hawkish stance. However, it remains to be seen if the Fed will increase the pace, as inflation seems likely to remain, at least for the short-term,” stated Mike Loewengart managing director of investment strategy at E-Trade. With Covid cases increasing, it is possible that the effects on the supply chain, labor shortages, and the overall economy could continue to increase, which will only lead to higher prices.
The inflation is affecting otherwise solid wage gains. Real hourly earnings saw a 0.1% decrease in the month. This was despite the 0.5% CPI headline gain. According to, real earnings fell 2.4% year-over-year. BLS calculations.
Fed officials mostly attribute the rising inflation pressures in part to pandemic-specific problems, where a lack of workers has caused clogged supply chain and empty shelves. Although there is evidence that the number of omicron variants could be high, Paul Ashworth, Chief U.S. Economist at Capital Economics, said that lingering Covid issues and cold weather in Northeast points to “renewal upward pressure on food costs.”
Prices for food rose by 0.5% in December, and they were up 6.3% over a 12-month period. It was the highest increase since October 2008.
Most investors expect that the Fed will raise rates by March. Jerome Powell (Fed Chairman), who was confirmed Tuesday by the Senate Banking Panel, didn’t give specific dates but said that rates will rise as long the current economic conditions continue.
The market is pricing in a 79% probability for May’s first quarter-percentage points increase and a half chance that the Fed will enact four more in 2022. According to the CME’s FedWatch Tool.