U.S. consumer prices post biggest annual rise in 40 years

  • Consumer prices rose 0.6% in January
  • CPI up 7.5% year on year
  • Core CPI gains 0.6%; up 6.0% year-on-year
  • Weekly jobless claims fall from 16,000 to 223,000

WASHINGTON, Feb 10 (Reuters) – U.S. consumer prices rose sharply in January, driving the biggest annual rise in inflation in 40 years, fueling speculation in financial markets for a sharp 50 basis point rise Federal Reserve interest rates next month.

The sharp price increase reported by the Labor Department on Thursday was driven by soaring costs for rent, electricity and food, and could put more political pressure on President Joe Biden, whose popularity has waned. in a context of concern about the rising cost of living.

High inflation, which has exceeded the Fed’s 2% target, threatens to jeopardize Biden’s economic program. It eclipses a strong economy, which grew at its fastest pace in 37 years in 2021, and a labor market that is rapidly creating jobs.

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“For the Fed, this report is another wake-up call. Inflation is here and it continues to make its presence known everywhere,” said Alexander Lin, economist at Bank of America Securities in New York. “We believe today’s releases encourage the Fed to act more quickly, and the market will likely encourage the Fed to hike 50 basis points at the next meeting.”

The consumer price index gained 0.6% last month after a similar rise in December. Food prices rose 0.9%, with the cost of food eaten at home rising 1.0%. Prices for cereals and bakery products, dairy products, fruits and vegetables rose sharply. Meat prices rose moderately.

Electricity prices jumped 4.2%, offsetting cheaper gasoline and natural gas.

In the 12 months to January, the CPI jumped 7.5%, the biggest year-on-year increase since February 1982.

This followed a 7.0% advance in December and marked the fourth consecutive month of annual increases above 6%. Economists polled by Reuters had forecast the CPI to rise 0.5% on the month and accelerate 7.3% on an annual basis.

Beginning with the January report, the CPI has been reweighted based on 2019-20 consumer spending data. This increased the weight of goods and reduced services.

The economy is struggling with high inflation, caused by a shift in spending towards goods at the expense of services during the COVID-19 pandemic. Billions of dollars in pandemic relief have boosted spending, which has hit capacity constraints as the coronavirus sidelined the workers needed to produce and get goods to consumers.

Stocks on Wall Street were trading lower. The dollar appreciated against a basket of currencies. US Treasury prices fell.

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EYES ON THE FEDERATION

A family shops in Bentonville, Arkansas in a file photo. REUTERS/Rick Wilking

The Fed is expected to start raising rates in March to contain inflation. Financial markets are predicting an almost equal probability of a 50 basis point hike, according to CME’s FedWatch tool.

The market forecast is partly driven by mounting pricing pressures, with several measures of wage inflation rising sharply in recent months.

But not all economists think the Fed would act so aggressively, arguing it would lead to stagnant economic growth. Many expect the central bank to raise rates by 25 basis points at least seven times this year.

“In this environment, an overly reactive Fed that starts to tighten too much too quickly could mean we end the year with much slower growth to accompany lower inflation,” said David Kelly, chief global strategist at JP Morgan Asset Management in New York.

Excluding the volatile food and energy components, the CPI rose 0.6% last month, matching December’s rise. It was the seventh time in the last 10 months that the so-called core CPI rose by at least 0.5%.

Core inflation last month was driven by a 0.5% rise in rents, the biggest rise since May 2001.

It was also boosted by sharp increases in the prices of home furnishings and operation as well as used cars and trucks. Health care costs rose 0.7%, driven by hospital services and prescription drugs. Prices for new motor vehicles remained stable.

In the 12 months to January, the so-called core CPI jumped 6.0%. This is the largest year-over-year gain since August 1982 and follows a 5.5% advance in December.

Monthly inflation could ease in the coming months amid easing supply bottlenecks as coronavirus infections caused by the Omicron variant decline. With basic goods now having a greater weight in the CPI, the expected return of spending towards services should also help moderate inflation.

Merchandise imports hit a record high in December as ships unloaded their cargo after months of delays due to labor shortages at ports. In December, wholesale motor vehicle inventories rose the most in 10 years.

Nevertheless, inflation will remain elevated for some time, partly reflecting the delayed impact of rising wages. Employers are increasing pay as they compete for scarce workers. There were 10.9 million job openings at the end of December.

“It will take much colder inflation data than what we saw in today’s report to bring inflation significantly closer to the Fed’s 2% target,” Sarah said. House, senior economist at Wells Fargo in Charlotte, North Carolina. “As the most immediate price distortions caused by the pandemic and the initial policy response dissipate, wage pressures continue to build and point to a more persistent source of inflation.”

That was underscored by a second Labor Department report showing initial claims for state unemployment benefits fell from 16,000 to a seasonally adjusted 223,000 for the week ended Feb. 5. Demands had hit a three-month high in mid-January as Omicron raged across the country.

Although wages are skyrocketing, these gains are wiped out by inflation. Average inflation-adjusted hourly earnings fell 3.1% in January. According to economists at Moody’s Analytics, inflation was costing the average household more than $250 a month.

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Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci

Our standards: The Thomson Reuters Trust Principles.

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