Consumer prices showed no signs of slowing in January, rising 7.5% year on year, the Labor Department reported Thursday.
The reading was above forecasts of a 7.3% annual increase and will put more pressure on the Federal Reserve and Chairman Joe Biden to get it under control.
Increases in the cost of food, electricity and housing were the main causes of the rise. The rise in the benchmark index, which excludes food and energy, was 0.6% for the month, as in December.
The level is more than double the Fed’s annual target of an average of 2%, paving the way for the central bank to raise interest rates as early as March. The Fed has already begun to scale back its monthly purchases of Treasuries and mortgage-backed securities, a program it launched at the start of the coronavirus pandemic in March 2020.
Bond yields rose in anticipation of higher interest rates, as did mortgages. Demand for mortgages fell 10% last week, with the average rate on a 30-year fixed rate loan hitting 3.83%.
Although the omicron variant of the coronavirus slowed economic activity towards the end of last year, the labor market remains hot with 467,000 jobs created in January and an unemployment rate at 4%. Meanwhile, many restrictions, including mask mandates, are being lifted, paving the way for a return to normalcy.
The Fed is facing the highest level of price inflation since the 1980s and is generally considered to be behind in the fight against inflation. Analysts are divided on its aggressiveness in the coming months, as the economy is already slowing from the blistering pace of 2021.
“We now expect first quarter U.S. real GDP (gross domestic product) to have grown at an annualized rate of just 0.7%, down from our initial call of 2.9% a month ago,” Sam Bullard, Managing Director and Senior Economist at Wells Fargo Corporate & Investment Banking. , wrote on Wednesday. “The downward revisions to our first quarter guidance focus on our outlook for personal consumption spending, in part due to the growth profile in the fourth quarter which resulted in difficult baseline comparisons.”
Wells Fargo also lowered its growth forecast for the next two years due to the reduction of stimulus measures from Washington, as well as the persistence of inflation.
“We expect full-year GDP growth to increase to 3.4% in 2022 and 2.9% in 2023 (compared to 3.9% and 3.1%, respectively, in last month’s forecast) “, added Bullard.
Other economists say some of the reasons for the surge in inflation, such as supply chain disruptions and a tight labor supply, could reverse.
“Foreign goods entering the United States have increased in each of the past five months and hit a record $259.7 billion in December,” Bernard Baumohl, chief global economist at the Economic Outlook Group, wrote on Wednesday. “These imports help replenish depleted warehouses and back lots. Retail inventories, for example, rose 4.4% in December to $643.8 billion, the highest since the pandemic began. »
“And more supplies are on the way,” Baumohl added. “Wholesalers were stocking shelves with the value of inventory hitting a record $790.8 billion in December, up nearly 20% from a year ago. These articles covered a wide range of products – capital goods, consumer goods and motor vehicles. This massive restocking of business inventories contributed more than half of the economy’s 6.9% GDP growth rate in the last three months of the year. »
And, he noted, January saw a record 1.55 million people employed in the trucking industry, with an additional 1.73 million workers in warehousing and storage jobs to move goods. supplies faster.
“These are deflationary forces at work,” he said. “The Federal Reserve Bank of New York and the Institute for Supply Management also noted an improvement in supply chain activity. Although this is not the case for all industries, such as semiconductors, there is measurable relief in many other sectors of the economy.
Adding nearly half a million workers to the payroll in January will also dampen rising wage inflation, Baumohl said.
“In January alone, the labor force jumped by 1.4 million, the largest one-month increase since June 2020, when it rebounded from the COVID-related collapse. As a result, the labor force participation rate and the employment-to-population ratio have reached their highest level since the start of the pandemic. As labor supply increases, this will also ease wage pressures and we should see the first evidence of this by mid-year.
Baumohl is calling for a half-point interest rate hike at the March Fed meeting, a figure that has recently won favor with market strategists and economists who believe the Fed needs to send a signal after declaring throughout 2021 that peak inflation was “transient.” That would be above the more typical 0.25 basis point hikes the Fed has made in the past.
But others think the recent stock market selloff may have done a bit of the Fed’s job, while market interest rates also rose.
Fed Chairman Jerome Powell “said they were going to be very flexible” and watch the data before acting too strongly, says Dan Wantrobski, associate director of research at Janney Montgomery Scott. “Powell doesn’t like to bend to the markets, but we are in a correction.”
While the consumer price index will remain high, adds Wantrobski, “we have the feeling that there is going to be a pullback.”