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Annual inflation in the U.S. rose to 7%, hinting at the need to raise rates in the spring

Consumer prices in the U.S. rose in December 2021 to the highest in almost 40 years, gradually cementing the foundation for the start of the Fed’s interest rate hike in March 2022. According to data published on Wednesday, January 12, by the U.S. Department of Labor, the consumer price index rose in the last month of last year by 0.5% mom and 7% — the most significant year-on-year increase since June 1982. At the same time, core consumer inflation increased by 5.5% by December 2020.

The impact of bottlenecks in supply chains remains very noticeable. Prices of essential goods rose by 1.2% — the most significant increase since June on a month-on-month basis.

The main drivers of inflation were clothing (+1.7%) and new and used cars (+1.8%). At the end of the year, the deficit played a role in rising car prices.

Not reflect The influence of the omicron strain in the December inflation report. They are in January. And in December, the prices of tourist services increased by 0.2%, while the price increase in restaurants was 0.6%, and public transport rose quite sharply — by 2%. On the other hand, energy prices declined in December. However, this is a temporary phenomenon, judging by the current exchange prices for oil and gas.

The housing cost component also decreased on a month-to-month basis due to a weaker increase in accommodation prices in hotels and motels. Payments for basic housing and rent equivalent to own residential real estate account for almost one-third of the consumer price index. According to various indices of renting housing costs, this component may form the central upward pressure on inflation in 2022. The markets reacted positively to the inflation data.

There was a confident, positive trend on stock exchanges in the United States and Europe. Treasury bond yields declined for the third day in a row after rising on Monday to a new 2-year high (1.8064% on 10-year securities). The dollar has fallen in price against the background of declining treasuries yields. At the same time, the pace of the dollar’s decline by the technical penetration of the lower limit of the 2-month range on the dollar index.

The federal funds rate with a probability of 87% implies that the Fed will make the first rate hike in March. The market is 100% sure of three rate hikes by the end of 2022 and with a probability of 52%, implying that the rate will not be three but four times by the end of December. A day ago, the market with a chance of 85% indicated the first increase in March, and only 42% put in quotes a possible fourth increase before the end of the year.


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