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Inflation ran at 7.5 percent in January, year over year, its fastest pace since February 1982, topping December’s 7-percent rate.
Used-car prices soared 40 percent year on year; the cost of energy climbed 29 percent.
Overall food costs shot up 7 percent, their sharpest annual gain since 1981, with grocery prices rising 7.4 percent and restaurant menu prices up 8 percent.
A dramatic rise in residential rents added almost a third of last month’s inflation figure, Aichi Amemiya, Nomura Securities’ senior economist, said to The Wall Street Journal. Rental vacancies dropped to 5.6 percent, the lowest since the 1980s.
The Consumer Price Index rose 0.6 percent in January from December, the same rate as the month before.
Inflation’s near-record rate boosted chances that the U.S. Federal Reserve will act quickly and dramatically to raise interest rates, a concern that weighed on equity markets and sent bond prices to their highest in more than two years (see related story in this issue).
By some measures, the U.S. economy is doing well.
It grew by 5.5 percent last year, faster than in any year since 1984. Businesses added 1.6 million jobs in 2021’s final quarter. Employers have raised wages 5.1 percent in the year ending 31 January to attract and hold scarce workers.
However, dramatic wage gains over the last year have failed to match inflation, leaving workers with less usable income despite fatter paychecks.
That sets conditions for a wage-price spiral, in which workers demand more pay to cover rising costs, forcing businesses to raise prices to pay workers more.
Almost three-quarters of 133 large-corporation CEOs surveyed by the Conference Board said the Fed’s pending rate hikes will not immediately rein in inflation.
Instead, they cited supply chain woes and rising labor costs as key factors.
TRENDPOST: At his December 2020 press conference, Fed chair Jerome Powell pointed to “disinflationary pressures around the globe” and said “it’s not going to be easy to have inflation move up.”
A month later, with inflation on the move well above the Fed’s 2-percent target rate, Powell said it was only “temporary.”
In July, with inflation running at 5 percent, Powell told a Congressional committee that “we really do believe that these things will come down of their own accord as the economy reopens,” he noted.
Treasury secretary Janet Yellin echoed his mistaken view in a 24 October CNN interview, describing high inflation as “temporary” (“Powell, Yellin Agree: Higher Inflation Ahead,” 26 Oct 2021).
Wrong, wrong, wrong, and wrong.
As we noted in “Fed: Stronger Economy, Steady Rates” (23 Mar 2021), Fed officials predicted overall U.S. inflation in 2021 would be 2.4 percent.
Instead, it topped 6 percent in October and has averaged 4.1 percent from January through October.
Until November, Powell and the Fed’s Open Market Committee were referring to inflation as “temporary,” which became “transitory,” a more useful weasel word as what Powell had called “temporary” stretched into its 10th month.
In 30 November testimony to Congress, Powell admitted it was “probably a good time to retire” the Fed’s characterization of inflation as transitory.
In fact, considering his inaccuracy, it is “probably a time to retire” Powell, but president Joe Biden has reappointed Powell for another term as Fed-Head of the Bankster Bandits.
As we noted in “The Powell Push: For Better or Worse” (7 Dec 2021), the Fed’s credibility has become another casualty of the COVID War.
TREND FORECAST: The Fed has woken up too late to the reality of inflation’s threat, having called it “temporary,” then “transitory,” through almost all of 2021, as we have documented in “Inflation Tsunami Approaching” (4 May 2021), “Inflation Soon To Get Much Worse” (18 May 2021), “Fed Officials Send Mixed Signals on Policy Shift” (29 Jun 2021), “When Will Fed End Cheap Money Policy?” (27 Jul 2021), and in many of our “Market Overview” sections.
Because the Fed is entering the inflation fight late, prices will continue to rise sharply through the first half of this year.
Part of the rise will be due to consumers rushing to finance cars, homes, and other big-ticket items before rates go up, so increased demand will drive prices still higher while supply chains are still snarled.
Also, a shortage of key raw materials, from nickel to copper to computer chips will keep pushing factory costs higher, as we have documented in articles such as “Commodities Supercycle Underway?” (11 May 2021), “Nickel is the New Gold” (21 Sep 2021), and “Chip Shortage Slashes Economic Outlook” (2 Nov 2021).