Consumer prices rose 0.8% in December from November, rising at an annual pace of 7%, the highest in four decades, the Labor Department reported on Wednesday.
The reading of the consumer price index came in right at expectations and was driven by increases in the price of used cars and shelter costs. It compares with a 6.8% annual rate in November.
“Increases in the indexes for shelter and for used cars and trucks were the largest contributors to the seasonally adjusted all items increase,” the report noted. “The food index also contributed, although it increased less than in recent months, rising 0.5 percent in December. The energy index declined in December, ending a long series of increases; it fell 0.4 percent as the indexes for gasoline and natural gas both decreased.”
Core CPI, which excludes the often volatile food and energy categories, rose at an annual pace of 5.5%, the highest level since 1991.
The persistence of inflation was one of the reasons the Federal Reserve Board last month did away with the term “transitory” to describe the spike in prices and decided to accelerate its wind down of purchases of Treasuries and mortgage-backed securities.
That $120-billion-per-month program had been put in place at the start of the coronavirus pandemic and now will run out by March, after which the Fed is widely expected to begin raising interest rates.
Speaking at his confirmation hearing for renomination to another term as chairman of the central bank, Jerome Powell told members of the Senate Banking Committee on Tuesday that the Fed “will use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.”
The high inflation is hurting both workers and their employees, as even a nearly 5% rise in average wages over the past year has failed to keep pace with prices. Companies, meanwhile, face a tight labor market in which they are having to bid up wages to attract and retain talent while also being forced to pass higher prices on to consumers.
“Employers will need to be creative in this workers’ economy,” Rucha Vankudre, senior economist at labor market data analytics company Emsi Burning Glass, said. “Raising wages is only one way that will help you sustain your people during this Great Resignation. You also need to value your people by offering more flexible hours, remote work opportunities, and internal pathways to get ahead within the company.”
Already, there are some signs that prices may abate in the new year, with lower-than-expected job growth in the late months of 2021 and isolated reports that some of the supply chain bottlenecks have eased. But the path of the economy going forward is still tied to the coronavirus, especially the recent surge of cases globally from the omicron variant.
“‘We remain constructive on the economic outlook and equity market in 2022,” says Luke Tilley, chief economist and chief investment officer at Wilmington Trust. “We expect a solid pace of U.S. economic growth, with the economic cycle continuing through 2022. Key risks to our outlook include dampening of consumer activity from Covid-19, stubbornly high inflation, and a more hawkish Fed.”
Tilley forecasts inflation will moderate to a 3% annual rate by the middle of the year.