US consumer prices are likely to extend their eye-popping gains after soaring last year by the most in nearly four decades, further burdening Americans and ramping up pressure on policymakers to act.
The consumer price index (CPI) climbed 7% in 2021, the largest 12-month gain since June 1982, according to labor department data released this week. The widely followed inflation gauge rose a faster-than-expected 0.5% over the month.
Investors took a relatively sanguine view of the data, which was broadly in line with expectations.
Though many economists anticipate inflation to moderate to about 3% over the course of 2022, consumers are probably months away from a meaningful respite, especially as the Omicron variant of the coronavirus worsens labour shortages and prevents goods from reaching store shelves.
If signs fail to materialise that inflation is moderating, Federal Reserve policymakers could be forced to embark on a steeper path of interest-rate hikes and balance-sheet shrinkage.
“The breadth of gains in recent months gives inflation inertia that will be difficult to break,” said Sarah House, senior economist at Wells Fargo. “We expect the CPI to remain close to 7% the next few months.”
The report did offer some comfort to American families. Energy prices fell last month for the first time since April and food prices — though still rising — moderated somewhat as the cost of meat fell. US President Joe Biden said that reflected “progress” from his administration while acknowledging there is more work to be done.
Workers’ wages are simply not keeping up. Despite a slew of robust pay raises last year as businesses sought to fill a multitude of open positions, inflation-adjusted wages were down 2.4% in December from a year earlier.
Whether inflation falls as expected will depend on supply chains normalising and energy prices levelling off. However, higher rents, robust wage growth, subsequent waves of Covid-19 and lingering supply constraints all pose upside risks to the inflation outlook.
Though moderation is expected in some categories like vehicle prices and apparel, there is “no particular reason to expect much of a cooling for the rest of the core”, said Stephen Stanley, chief economist at Amherst Pierpont Securities.
“Sure, there will be goods categories that cool off once supply bottlenecks begin to ease later this year but at the same time, the pressure from wages to prices is only going to ramp up,” Stanley said.
Bloomberg
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