Inflation Could Hit a 40-Year High. The Squeeze Is on the Fed.

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Inflation in December likely rose at the fastest annual pace in four decades as consumer prices continued to rise, putting pressure on the Federal Reserve to act quickly to tighten monetary policy before rising prices.

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Economists are forecasting a 7% year-on-year increase in the consumer-price index in December, up from November’s 6.8% rate, the fastest annual pace since the early 1980s. The consensus expects the pace of price increase to slow down during the month, however, from a pace of 0.8% in November to 0.4% in December. Labor Department will release December figures on Wednesday at 8:30 am

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The core CPI, which excludes volatile food and energy sectors, is expected to grow 5.4 per cent in December, up from November’s 4.9 per cent annualized rate.

The latest release comes as Fed Chairman Jerome Powell testified on Capitol Hill on Tuesday that he expects inflationary pressures to last well into the middle of this year and is looking to use central bank tools to rein in rising prices. vowed to raise interest rates. While Powell gave few indications about the timing of the first rate hike, some of his colleagues have already suggested a hike is on the table in March. This would align the first rate hike with the end of the Fed’s asset-buying stimulus program, which was put in place for the pandemic and which expires in March.

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Another hot inflation reading, as expected, will only strengthen the case for earlier and faster action. “If we see that inflation remains high for longer than expected, if we have to raise rates further over time, we will,” Powell said on Tuesday.

The strong inflation numbers also add to expectations that the central bank may combine a hike in interest rates with a quantitative tightening — when the Fed begins to shrink its $9 trillion balance sheet — earlier this year. Economists at BNP Paribas this week pushed forward their expectations of a quantitative tightening starting in July, the first from 2023.

A key area to watch in the December data will be how widespread the broad-based price pressures are, which would indicate how far inflation has spread beyond some of the major pandemic-hit sectors that started raising costs early last year. Had given.

Economists expect the report to reflect inflationary pressures spread across multiple categories. For example, goods, such as clothing, ran into port overcrowding issues during the holidays, which could drive up prices. Auction data shows that the price of used cars is increasing continuously. Expectations of a declining trend in gas prices remained fairly flat during the month.

And perhaps most worrying for the economy, the cost of rent and shelter is also expected to continue rising. There high costs can keep core inflation high for months, as rents can rise over 12 to 18 months behind home prices. Also, landlords are unlikely to bring back rents once they are high.

“The more acceleration you see there, the more likely it is,” says Paul Ashworth, chief North America economist at Capital Economics.

A major remaining open question now for Wall Street and the central bank is how long it might take for inflation to return close to the Federal Reserve’s 2% target, as determined by its preferred gauge, the personal consumption spending price index. Is. This question is particularly prevalent as Omicron variants rage, supply chain issues persist, consumer demand remains strong, and labor force participation slows.

“No one really expects inflation to remain at 7%,” Ashworth says. “The big question is whether it’s coming back at 2, and I think there is no prospect of an answer … at least this year, and probably next.”

Write to Megan Cassella at [email protected]

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