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Consumer Inflation at 39-Year High With No End in Sight

Consumer prices surged 7% last year, the biggest 12-month gain in 39 years. The Fed may raise rates as soon as March. And three hikes might not suffice.
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U.S. inflation continues to rage, with the consumer price index soaring 7% in 2021, its biggest 12-month increase since June 1982, the government reported Wednesday.

Red-hot inflation has the Federal Reserve poised to raise interest rates as soon as March. Fed Chairman Jerome Powell on Tuesday signaled the central bank’s readiness to act, saying inflation represents a “severe threat” to economic recovery

The food, shelter and used-vehicle categories led the index higher in December. Excluding food and energy, the CPI rose 5.5% last year.

For much of last year, many government and officials labeled inflation as transitory, but that’s clearly not the case now. Economic demand is exceeding supply. Wages are rising, thanks in part to pandemic-crimped labor shortages. The government reported last week that average weekly earnings soared 4.7% in the 12 months through December.

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The supply chain remains snarled, with the latest Covid outburst in China limiting activity in its factories and at its ports. Before the outbreak of the omicron Covid strain last month, many economists forecast supply-chain strains would ease later this year. Now the timing is anyone’s guess.

So it’s unclear when the inflation surge will ease. The median forecast of Fed officials last month called for three interest-rate hikes this year. But many economists say that won’t be enough to do the trick. Goldman Sachs now predicts four rate increases.

“Declining labor market slack has made Fed officials more sensitive to upside inflation risks and less sensitive to downside growth risks,” Goldman’s chief economist Jan Hatzius wrote in a commentary Sunday.