U.S. consumers could be forgiven for feeling as if they were trapped in an unpleasant time warp, with the latest government data showing inflation surging last month at the fastest annual rate in 40 years.
The U.S. Labor Department said Wednesday that the consumer price index (CPI), which measures changes in prices for a basket of goods and services, rose 7 percent in December from a year earlier. This was the largest 12-month peak since June 1982.
On a monthly basis, CPI rose 0.5% in December after surging 0.8% in November.
Soaring inflation has become a hallmark of the U.S. economic recovery as disruptions in supply chains and shortages of materials and workers push up costs for businesses. Businesses, in turn, pass on at least a portion of these higher input costs to consumers.
Inflation has been especially severe for low-income households, whose incomes are consumed by rising prices, especially for necessities such as food, fuel and shelter.
A very worrying pressure point is the surge in rents, which, along with used car and truck prices, was the biggest factor behind the December CPI surge.
Thankfully, food prices rose 0.5% last month, but the increase was lower than in previous months. The price of natural gas, which nearly half of U.S. households rely on as their primary heat source, fell along with gasoline prices, ending a long run of gains.
Excluding food and energy, which tend to be the most volatile components of the CPI, the so-called core index rose 0.6% in December and 0.5% in November.
Last year, the core CPI rose 5.5% last month, the largest annual gain since 1991.
Inflation and Interest Rates
Inflation is so high that late last year, the Fed shifted from keeping borrowing costs low to keep Americans back to work to reining in soaring price pressures.
At its last policy-setting meeting, the Fed said it was accelerating the tapering of its bond-buying program — which has boosted job growth but boosted inflation by keeping long-term borrowing costs low — and planned to raise rates at least three times this year to cool it.
A little bit of inflation is a good thing because it keeps the economy humming by enticing consumers not to put off purchases. This is important because consumer spending drives two-thirds of U.S. economic growth.
But too much inflation is definitely bad, because if prices spiral, and crucially — consumers expect them to continue soaring — it could lead to more aggressive rate hikes by the Fed than expected, with ramifications for the recovery. strong impact.
during his confirmation hearing Jerome Powell, re-elected Fed chairman on Tuesday, said he and his policymakers do see inflation ease by the middle of the year. But he also assured senators that it would act if the Fed sees “inflation at high levels for longer than expected.”
“If we had to raise interest rates further over time, we would,” he said, adding that “high inflation is a serious threat to maximizing employment and achieving long-term expansion.”
Meanwhile, the recovery in the U.S. job market is on track. Although the economy added a disappointing 199,000 jobs in December, the country’s unemployment rate edged down to 3.9%, close to the pre-pandemic level of 3.5%.
The near-record number of job openings has led companies to boost pay and benefits packages to lure intimidating job seekers.When measuring how confident workers are about their employment prospects, they are Quitting jobs in record numbers – Often in high-paying positions.
This was reflected in average hourly earnings for all workers, which rose 4.7% in December from a year earlier.