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Fed likely to raise rates after inflation hits 40-year high

US consumer prices increased solidly in December as rental accommodation and used cars maintained their strong gains, culminating in the largest annual rise in inflation in nearly four decades, which bolstered expectations that the Federal Reserve will start raising interest rates as early as March.

The report from the Labor Department on Wednesday followed on the heels of data last Friday showing that the labor market was at or near maximum employment.

Fed Chair Jerome Powell on Tuesday said the US central bank stood ready to do what was necessary to keep high inflation from becoming "entrenched," in testimony during his nomination hearing before the Senate Banking Committee for a second four-year term.

The high cost of living, the result of snarled supply chains because of the COVID-19 pandemic, is a political nightmare for President Joe Biden, whose approval rating has taken a hit.

"The Fed is going to be forced to begin raising rates in March and depending on the political pressure on them – from both sides of the aisle – they are going to have to raise rates four or more times in this year and potentially more than that next year," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in North Carolina.

The consumer price index rose 0.5 percent last month after advancing 0.8 percent in November. In addition to higher rents, consumers also paid more for food, although the 0.5 percent increase in food prices was less than in the prior three months. There were big gains in the prices of fruits and vegetables, but beef prices fell 2.0 percent after recent sharp gains.

Consumers also got a respite from gasoline prices, which fell 0.5 percent after rising 6.1 percent in both November and October.

In the 12 months through December, the CPI surged 7.0 percent – the biggest year-on-year increase since June 1982 and well beyond the Fed's flexible 2 percent target.

Last month's inflation readings were in line with expectations. Rising inflation is also eroding wage gains. Inflation-adjusted average weekly earnings fell 2.3 percent year-on-year in December.

Biden said virtually every nation was afflicted with inflation as the global economy recovers from the pandemic.

Guo Jiayi

Authors from Mauritius: Guo Jiayi!

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