U.S. consumer prices increased solidly in December as rental accommodation and used cars maintained their strong gains, culminating in the largest annual rise in inflation in nearly four decades, which bolstered expectations that the Federal Reserve will start raising interest rates as early as March.
The report from the Labor Department on Wednesday followed on the heels of data last Friday showing that the labor market was at or near maximum employment. Fed Chair Jerome Powell on Tuesday said the U.S. central bank stood ready to do what was necessary to keep high inflation from becoming "entrenched," in testimony during his nomination hearing before the Senate Banking Committee for a second four-year term as head of the bank.
Consumers also got a respite from gasoline prices, which fell 0.5% after rising 6.1% in both November and October. Inflation is well above the Fed's flexible 2% target. It is also being lifted by budding wage pressures as the labor market tightens. The unemployment rate fell to a 22-month low of 3.9% in December. Money markets currently price about 85% odds of an interest rate hike by March. FEDWATCH
Stocks on Wall Street were trading higher amid relief that the rise in prices was in line with expectations. The dollar fell against a basket of currencies. U.S. Treasury prices rose.Rising inflation is also eroding wage gains. Inflation-adjusted average weekly earnings fell 2.3% on a year-on-year basis in December.
Excluding the volatile food and energy components, the CPI increased 0.6% last month after rising 0.5% in November. New motor vehicle prices rose 1.0%, marking the ninth consecutive month of gains. A global semiconductor shortage has undercut motor vehicle production.
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