Annual consumer inflation in the United States rose to 7% as prices rose at their fastest pace in nearly four decades.
But the real test of price is a year away.
What’s happening: According to the most recent survey of consumer expectations by the Federal Reserve Bank of New York, released earlier this week, Americans expect inflation to be 6% in a year. from now and 4% in three years.
This number is much higher than the forecast from the Federal Reserve. The central bank projected at its December meeting that inflation would stay at 2.6% in 2022.
For their part, bond market investors see inflation averaging 2.87% over the next five years.
Who’s right? That will largely depend on how effective the Fed is at addressing price increases through rate hikes. After pushing interest rates to near zero at the start of the pandemic, the central bank is expected to soon raise borrowing costs in an attempt to cool the economy.
Wall Street now sees a near 75% probability that the Fed will raise rates by 0.25% in March.
There are signs that consumers are increasingly confident that the Fed has problems under control. The New York Fed survey shows that uncertainty about where inflation will ease in December.
Fed Chairman Jerome Powell also said on Tuesday that he thinks a key factor in inflation – pressures in global supply chains – will ease this year, although some business leaders and Industry analysts disagree. During his confirmation hearing before the Senate, he told lawmakers his expectation was that the supply chain “will loosen up”.
But Powell conceded that if that doesn’t happen, and inflation “gets more persistent and higher” it will increase the risk of higher prices “ingrained” in businesses and households.
Why it matters: Inflation erodes consumers’ ability to spend and forces them to make tough choices about what to buy, hurting the economy. But the big concern right now is not whether severe inflation will occur – but whether it will continue to happen, triggering a damaging feedback loop as businesses continually raise prices and people workers demand higher wages to cover their costs or not. It’s a much deeper problem.
Powell said the Fed would react more aggressively if that pattern emerges. Goldman Sachs now thinks the central bank will raise interest rates four times this year. JPMorgan Chase CEO Jamie Dimon said in an interview earlier this week that even that estimate might be conservative.
“Maybe inflation is worse than they think and they raise rates more than people think,” Dimon told CNBC. “Personally I would be surprised if it only quadrupled in the next year.”
Lesson learned: December inflation data are a timely critical summary. But much attention is now focused on what will happen when the Fed becomes more assertive in the coming months.
Economist Mohamed El-Erian told CNN Business: “The risk of making a mistake increases when you’re in a hurry like this.
OIL PRICE IS BACK AT TWO MONTHS HIGHS
US oil prices surged on Tuesday, climbing above $81 a barrel for the first time in two months.
The Latest: Crude oil closed at $81.22 a barrel, up nearly 4% on the day. That is the highest level for oil since November 11, Matt Egan, my CNN business colleague, reports. Prices are rising again on Wednesday.
The latest gains release much of the softening experienced in energy markets in recent weeks. Prices at the pump have also paused their recent retracement. The national average is $3.30 a gallon, up a cent from a week ago, according to AAA.
Oil prices began to fall in early November due to rumors that the White House would intervene to cool the energy market. US President Joe Biden announced the largest-ever barrel release from the Strategic Petroleum Reserve later that month.
Crude oil continued to slide on fears of the Omicron coronavirus variant, falling to $65.75 per barrel in early December.
However, oil prices closed Tuesday about 24% higher than recent lows.
Profit boosting: Investors are showing confidence that the effects of the Omicron variant on the global economy can be limited. That means strong demand for the fuel is likely to continue. Supply may also be constrained as some members of the Organization of the Petroleum Exporting Countries (OPEC) and its allies struggle to meet production targets.
Louise Dickson, senior oil market analyst at Rystad Energy, told clients Tuesday that prices are “driven by positive demand signals for 2022 and expectations of global supply”.
See this space: US government forecasters have revised up their gas price forecasts.
The U.S. Energy Information Administration now predicts gasoline prices will average $3.06 per gallon in 2022. This is up from the EIA’s early December forecast of $2.88 per gallon.
INFLATION IS HIGH, BUT IT SHOULD BE HIGH NOW
Consumer prices in the United States may be rising at their fastest rate in 39 years, but there was a time when the situation was much worse.
Today’s price hike isn’t as bad as it was in the 1970s and early 1980s, Chris Isidore, my CNN Business colleague, reports.
Inflation reached 12.2% at the end of 1974, shortly after President Gerald Ford took office. This is nearly double the 6.8% annualized inflation that the US saw last November.
The inflation rate hit record highs of 14.6% in March and April 1980, contributing to President Jimmy Carter’s defeat in the fall election that year.
Economists say the United States won’t repeat itself simply because many parts of the economy have changed dramatically.
During the 1980s, the majority of American workers worked in unions and had contract provisions that automatically boosted wages when prices rose. As incomes rise, businesses continuously raise prices, creating a so-called “wage price spiral”.
Today, only about 12% of US workers are represented by unions, half the rate in 1983.
Other factors: Competition from foreign imports also prevents companies from raising prices sharply. Plus, the US economy is less sensitive to oil prices than it was a few decades ago.
“One of the most overlooked changes is the reduced energy intensity of the US economy,” said Louis Johnston, a professor of economics at Saint Benedict University in Minnesota.
