US inflation leaps 7% in 2021 to hit nearly 40-year high, shows data

1 week ago 31

The consumer price index climbed 7% in 2021, the largest 12-month gain since June 1982, according to Labor Department data

Topics
United States | U S inflation | economy

U.S. consumer prices soared last year by the most in nearly four decades, illustrating red-hot inflation that sets the stage for the start of Federal Reserve interest-rate hikes 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.

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.

The data bolster expectations that the Fed will begin raising interest rates in March, a sharp policy adjustment from the timeline projected just a few months ago. High inflation has proven more stubborn and widespread than the central bank predicted amid unprecedented demand for goods along with capacity constraints related to the supply of both labor and materials.

chart

Meanwhile, the unemployment rate has now fallen below 4%. Against this evolving backdrop, some Fed policy makers have said that it could be appropriate to begin shrinking the central bank’s balance sheet soon after raising rates.

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 kind of outlier events. I think they’re ready.”


The energy index declined 0.4% from November, the first monthly decline since April as gasoline prices slid. Food inflation climbed 0.5%, a slight deceleration from the previous month due to falling costs for meats.

“What we have now is a mismatch between demand and supply. We have very strong demand in areas where supply is constrained, particularly around goods, particularly around things like cars,” Fed Chair Jerome Powell told the Senate Banking Committee on Tuesday.

Desperate to fill open positions, businesses are increasing pay to attract and retain workers, particularly at the lower end. But rising prices are eroding those wage advances. Inflation-adjusted average hourly earnings dropped 2.4% in December from a year earlier, the biggest drop since May, separate data showed Wednesday. However, compared with a month earlier, they rose 0.1%, the first gain in three months.

Shelter costs—which are considered to be a more structural component of the CPI and make up about a third of the overall index—rose 0.4% from the prior month. Other gauges of home prices and rents have surged last year, likely presaging a sharp acceleration in the report’s housing metrics this year and offering an enduring tailwind to inflation.

Omicron—the dominant Covid-19 variant in the US—is poised to further disrupt already fragile supply chains as quarantines and illness prevent some employees from going to work. Spending on services like travel may slow, pushing down prices, but goods prices may move higher.

Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Read Entire Article