U.S. consumer prices soared last year by the most in nearly four decades, sapping the purchasing power of American families and setting the stage for the Federal Reserve to begin hiking interest rates as soon as March.
The consumer price index climbed 7% in 2021, the largest 12-month gain since June 1982, according to Labor Department data released Wednesday. The widely followed inflation gauge rose 0.5% from November, exceeding forecasts.
Excluding the volatile food and energy components, so-called core prices accelerated from a month earlier, rising by a larger-than-forecast 0.6%. The measure jumped 5.5% from a year earlier, the biggest advance since 1991.
The increase in the CPI was led by higher prices for shelter and used vehicles. Food costs also contributed. Energy prices, which were a key driver of inflation through most of 2021, fell last month.
The data bolster expectations that the Fed will begin raising interest rates in March, a sharp policy adjustment from the timeline projected just a few months ago. High inflation has proven more stubborn and widespread than the central bank predicted amid unprecedented demand for goods along with capacity constraints related to the supply of both labor and materials.
Meanwhile, the unemployment rate has now fallen below 4%. Against this evolving backdrop, some Fed policy makers have said that it could be appropriate to begin shrinking the central bank's balance sheet soon after raising rates.
Market expectations for Fed tightening expected in March and 2022 as a whole were largely unchanged after the report. Yields on 10-year Treasuries remained lower with the dollar, while the S&P 500 opened higher.
"In terms of where the Fed is on their dual mandate — inflation and the labor market — they're basically there," Michael Gapen, chief U.S. economist at Barclays Plc, said on Bloomberg Television. "I don't really think anything stops them going in March except one of these kind of outlier events. I think they're ready."
The energy index declined 0.4% from November, the first monthly decline since April as gasoline prices slid. Food inflation climbed 0.5%, a slight deceleration from the previous month due to falling costs for meats.
"What we have now is a mismatch between demand and supply. We have very strong demand in areas where supply is constrained, particularly around goods, particularly around things like cars," Fed Chair Jerome Powell told the Senate Banking Committee on Tuesday.
