Consumer prices in the United States rose steadily in December, with substantial gains in rental housing and used automobiles, resulting in the largest annual increase in inflation in nearly four decades, bolstering anticipation that the Federal Reserve may begin hiking interest rates as soon as March. The Job Department’s report came on the wake of data released last Friday that showed the labour market was at or near full employment. In testimony before the Senate Banking Committee on Tuesday, Fed Chair Jerome Powell said the bank was ready to do whatever it took to keep high inflation from getting “entrenched.”
Powell is seeking re-election to a second four-year term as the bank’s chairman. The high cost of living, caused by clogged supply chains as a result of the COVID-19 pandemic, is a political disaster for President Joe Biden, whose approval rating has plummeted. “The Fed will be forced to start raising rates in March, and depending on political pressure from both sides of the aisle, they will have to raise rates four or more times this year, and possibly more next year,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina.
Following a 6.8% gain in November, this was the largest year-over-year increase since June 1982. The inflation readings from last month were in line with predictions. Inflation is hurting wage gains as well. In December, inflation-adjusted average weekly wages declined 2.3 percent year over year. As the global economy recovers from the pandemic, President Biden stated practically every country is experiencing inflation. Inflation is significantly above the Fed’s accommodative objective of 2%. As the labour market tightens, it is also being boosted by emerging wage pressures. In December, the jobless rate hit a 22-month low of 3.9 percent. According to CME’s FedWatch tool, markets have priced in an 80% chance of a rate hike in March.