• Annual consumer prices rise 7% in December, core prices gain 5.5%.
  • Markets pricing the first fed funds hike in March.
  • US workers' wages fall victim to raging inflation.

The numbers are daunting. Consumer prices in December raced higher at the fastest pace in four decades. Ronald Reagan was President, Leonid Brezhnev led the Soviet Union, Germany was two countries and over half of Americans now alive were not born the last time inflation was this high in June 1982.  

The Consumer Price index (CPI), a gauge that goes back to 1947, rose 7% last month, reported the Bureau of Labor Statistics (BLS) on Wednesday. For the month prices increased 0.5%. Analysts had predicted the yearly gain and a 0.4% jump on the month, after the 6.8% and 0.8% increases in November. 

Core CPI, which excludes energy and food prices, rose 5.5% on the year, up from 4.9% in November and beating its 5.4% forecast. It was the largest core rate in nearly 30 years, since February 1991. Monthly gains were 0.6% on a 0.5% forecast and the same November rate. 

Prices have been increasingly volatile since crossing 5% in May. For the year CPI rocketed 500%, from 1.4% in January to December’s 7%. Core prices jumped 392%, from 1.4% at the start of the year to 5.5%. Both increases are the fastest on record for 12 months. 

Supply chain and manufacturing delays have been exacerbated by shortages of components, materials and workers, the last made far worse by the lightning spread of the Omicron variant through the United States. On Tuesday, 1.46 million new cases were diagnosed, the most ever, in any country. 

Government spending and Federal Reserve liquidity have sent unprecedented amounts of cash coursing through the economy, making the price distortion from product scarcity worse. 

Markets

Despite the rapid price gains markets were little disturbed as CPI was largely as forecast.

Equities closed modestly higher with the Dow adding 38.30 points, 0.11% to 36,290.23. The S&P 500 climbed 13.28 points to 4,726.35 and the NASDAQ rose 34.94 points to 15,188.39, its third positive day in a row. The dollar lost ground in all the major pairs. The EUR/USD closed at 1.1450, its highest against the dollar since November 12.

Treasury rates were slightly improved. The yield on the 10-year note closed higher at 1.757%, just below its 2022 and pandemic high finish of 1.78% on Monday.

10-year Treasury yield

CNBC

Price details and wages

The cost of housing, which in this context means both rental and purchase, rose 0.4% in December and 4.1% on the year. That was the fastest annual rate since February 2007 and the housing bubble that led to the financial crisis. 

Used car prices increased 3.5% in December, as component shortages continue to limit new vehicle production. Prices are 37.3% higher than one year ago. 

Energy costs fell slightly losing 0.4%, with fuel oil down 2.4% and gasoline off 0.5%. Energy prices are 29.3% higher on the year and gasoline, a staple for most American families, is 49.6% more expensive than it was in December 2020. 

Inflation has eliminated wage gains. Average Hourly Earnings rose 0.6% in December but CPI subtracted 0.5%. Over the year real earnings (Average Hourly Earnings -CPI) decreased 2.4%.

Conclusion: Federal Reserve

The astonishing increase in US consumer prices in 2021 is the base case for markets and the Fed.  

In the last three months, the Federal Reserve has abandoned its labor market focus for inflation. Though the Fed uses the Personal Consumption Expenditure Price Index for its guide, that measure has shown the same rapid price increases as CPI. 

The December Federal Reserve Market Committee (FOMC) meeting doubled the monthly reduction in the $120 billion bond program to $30 billion, ending the purchases in two months.

The governors are widely expected to initiate an anti-inflation series of rate hikes at the meeting on March 16. Fed Funds Futures have the odds of a 0.25% increase at 78.7%.

Fed Chair Jerome Powell, at his confirmation hearing on Tuesday before the Senate Banking Committee, said that as long as current inflation conditions exist rate hikes can be expected. 

CBOE

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Recommended Content


Recommended Content

Editors’ Picks

GBP/USD extends recovery gains to near 1.3250, as BoE looms

GBP/USD extends recovery gains to near 1.3250, as BoE looms

GBP/USD extends the recovery to near 1.3200 in European trading on Thursday, having found buyers near 1.3150. A fresh US Dollar pullback and a rebound in risk sentiment offer support to the pair ahead of the BoE policy announcements. 

GBP/USD News
EUR/USD advances to 1.1150, focus shifts to ECB-speak

EUR/USD advances to 1.1150, focus shifts to ECB-speak

EUR/USD is well-bid near 1.1150 in the European session on Thursday. The pair is underpinned by the renewed US Dollar retreat and an upbeat mood. Traders digest the Fed's dovish outlook, bracing for ECB-speak for fresh trading incentives. US data are also eyed. 

EUR/USD News
Gold price jumps back closer to all-time peak, $2,600 remains in sight amid fresh USD weakness

Gold price jumps back closer to all-time peak, $2,600 remains in sight amid fresh USD weakness

Gold price regains positive traction following the previous day's pullback from the all-time peak and builds on its steady intraday ascent heading into the European session on Thursday. 

Gold News
BoE expected to keep interest rate unchanged at 5% as price pressures persist

BoE expected to keep interest rate unchanged at 5% as price pressures persist

After a close call in August, the Bank of England’s September interest rate decision is keenly awaited for fresh cues on the bank’s future policy action and the pace of its bond sales.

Read more
Bitcoin surges to $62,000 mark after 50 bps Fed rate cut

Bitcoin surges to $62,000 mark after 50 bps Fed rate cut

Bitcoin and Ripple eye for a rally as they break and find support around their resistance barrier. Meanwhile, Ethereum demonstrates signs of recovery as it approaches a critical resistance level, indicating that an upward rally could be on the horizon if it successfully breaks through.

Read more
Moneta Markets review 2024: All you need to know

Moneta Markets review 2024: All you need to know

VERIFIED In this review, the FXStreet team provides an independent and thorough analysis based on direct testing and real experiences with Moneta Markets – an excellent broker for novice to intermediate forex traders who want to broaden their knowledge base.

Read More

Majors

Cryptocurrencies

Signatures