Inflation Hits 7.5%, Highest in 40 Years


Inflation soared over the last year, the Department of Labor reported Thursday, with consumer prices rising 7.5% in January compared to 12 months earlier.

The higher-than-expected reading shows that inflation accelerated last month, dashing hopes that price increases were slowing while also raising the likelihood that the Federal Reserve will pursue an aggressive course of interest hikes this year.

The report also likely reduces the odds that Democrats will be able to make President Biden’s Build Back Better agenda a reality, given Sen. Joe Manchin's (D-WV) concerns about inflation.

The details: The Consumer Price Index for All Urban Consumers rose 7.5% in January on a 12-month basis, the largest increase since the period ending February 1982. Used car prices were one of the main drivers, rising 40.5% over the last year. Energy prices were up 27%, with gasoline prices rising 40%. Food prices rose by 7%, while medical services increased by a more modest 2.7%.

Subtracting volatile food and energy prices from the index, so-called core inflation rose by 6% over the last 12 months — less than the broader index, but still the highest reading in four decades.

On a monthly basis, the Consumer Price Index for All Urban Consumers rose 0.6% in January, coming in above expectations while matching December’s increase.

The reaction: Analysts said the report suggests that inflation may be sticking around for longer than expected. “A rapid cyclical acceleration in inflation is under way,” said Andrew Hunter of Capital Economics. “And with labor market conditions exceptionally tight, it is unlikely to abate any time soon.”

James Knightley, chief international economist at ING, said the elevated inflation rate — along with corporations’ ability to keep raising prices — should spur the Fed to act quickly. “Inflation is at a new 40-year high and it isn’t just the rate that should be worrying the Federal Reserve, but also the breadth of corporate pricing power,” he said. “With wages, commodity prices and supply-chain strains all contributing, the Fed will need to respond aggressively.”

Traders on Wall Street pushed the yield on the 10-year Treasury over 2%, to the highest level since before the Covid-19 pandemic. However, Edward Moya, senior market analyst at the trading firm OANDA, cautioned that the upward pressure on interest rates may fade soon. “Yields are going to go higher but not significantly higher,” he said. The gap between yields and the inflation rate will likely close a bit, but Wall Street still expects inflation to return to below 3%, and with demand for Treasuries expected to remain strong, the upward pressure on rates could be limited. “[T]here could be exhaustion in this move,” he added.

Some economists stuck to their view that inflation will start easing in the near term. “Inflation is still hot, and obviously uncomfortably high, but it’s at its peak, and as the pandemic winds down, as supply chains iron themselves out, inflation will moderate,” Mark Zandi, chief economist at Moody’s Analytics told The Washington Post.

A bigger hike coming? The Fed is expected to start raising interest rates in March, and today’s report provided more ammunition for those arguing that the bank should move aggressively by starting with a half-percentage-point hike right off the bat.

James Bullard, president of the Federal Reserve Bank of St. Louis, said Thursday that he would like to see the Fed raise rates by a full percentage point by early summer, over the course of three meetings. “I’d like to see 100 basis points in the bag by July 1,” Bullard told Bloomberg News. “I was already more hawkish but I have pulled up dramatically what I think the committee should do.”

He added: “You have got the highest inflation in 40 years and I think we are going to have to be far more nimble and far more reactive to data.”

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