U.S. inflation rises to another 40-year high of 7%

·2 min read
The price of used cars has skyrocketed in the pandemic, largely due to a shortage of semiconductor chips that has caused far fewer new cars to be produced. (Bess Adler/Bloomberg - image credit)
The price of used cars has skyrocketed in the pandemic, largely due to a shortage of semiconductor chips that has caused far fewer new cars to be produced. (Bess Adler/Bloomberg - image credit)

The U.S. inflation rate is at its highest level in 40 years and shows no signs of slowing down, new data revealed on Wednesday.

The Consumer Price Index rose by 0.5 per cent in December alone, the U.S. Bureau of Labor Statistics reported, enough to push the annual inflation rate to seven per cent for the first time since 1982.

The figure was in line with what economists were expecting, but up from the previous 40-year high of 6.8 per cent in November.

Higher prices for shelter and for used cars and trucks were the largest contributors to the increase. Prices for used vehicles went up by more than 37 per cent last year. Prices are up mostly because a global shortage of semiconductor microchips has slashed the number of new cars that can be produced, which has caused many buyers to scramble to find used ones instead.

After being a major contributor to the upside for several months, energy prices decreased by 0.4 per cent in the month, as the price of gasoline and natural gas both came down from highs. On an annual basis, however, energy prices are up by about 29 per cent, and gasoline in particular has increased by almost 50 per cent.

The high inflation rate presents a conundrum for policy-makers at the U.S. Federal Reserve, who are bent on keeping interest rates low to help stimulate the economy due to the COVID-19 pandemic. But all that cheap lending is causing the price of just about everything to jump.

Rate hikes coming

Sal Guatieri, a senior economist and director at BMO Capital Markets, said Wednesday's numbers were a harsh reminder to the Fed and everyone else of the threat that inflation poses. "Yesterday, [Fed] chair [Jerome] Powell warned that high inflation is a severe threat to the recovery and that the Fed would need to act to prevent it from becoming entrenched," he said.

Economists expect the U.S. central bank will have to raise its benchmark interest rate as much as four times this year.

"He really didn't need to remind anyone that the economy no longer needs aggressive stimulus, and today's report will only reinforce the view that the Fed might have fallen well behind the curve and may need to catch up in a hurry," Guatieri said.

TD Bank senior economist and director Leslie Preston said while the figures are eye-poppingly high now, consumers should brace themselves for even higher numbers in the months ahead.

"Buckle up," she said. "After reaching new highs, core inflation is likely to get even higher in the first quarter of 2022 on a year-on-year basis as price levels are compared to relative weakness in early 2021."

Preston added that "we expect rate hikes are not very far behind."

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting