Underlying inflationary pressures also rose, pointing to inflation stuck in high gear for longer
Inflation in the United States picked up its pace once again, accelerating to an annual 7.5 percent in January, the highest rate in 40 years and above analysts’ expectations, according to data released by the Bureau of Labor Statistics (BLS).
January’s acceleration in the Consumer Price Index (CPI), which reflects inflation from the perspective of end consumers, marks the eighth straight month of prices rising faster than 5 percent year-over-year and a faster pace than December’s 7.0 percent pace.
On a month-over-month basis, the pace of headline CPI inflation held steady at 0.6 percent in January, matching December’s pace and delivering a fresh sign of inflation stuck in high gear.
Consensus forecasts predicted a 7.3 percent rate of annual CPI and a 0.5 percent reading in the monthly measure.
Inflation Risks ‘Tilted to the Upside’
Not only is January’s annual pace of CPI inflation the highest since February 1982, when it hit 7.6 percent, it is also far above the Federal Reserve’s target of 2 percent as reflected in a separate but related inflation gauge, pressuring policymakers to tighten loose monetary settings to knock some of the wind out of surging prices.
“Inflation readings in the U.S. are at their highest levels in nearly 40 years, and nominal wages are accelerating at a faster pace than we have seen in decades,” Loretta Mester, president of the Cleveland Fed and a voting member of the Federal Open Market Committee (FOMC), said in prepared remarks on Wednesday for a virtual event hosted by the European Economics and Financial Centre.
Noting that inflation risks are “tilted to the upside,” Mester said she backs raising the Fed’s key interest rate in March.
“While the Omicron variant may weigh on activity in the near term, the high levels of inflation and the tightness in labor markets make a compelling case to begin recalibrating the stance of monetary policy,” she said.
Wages have shot up in the United States, adding to fears of a possible wage-price spiral of the sort that bedeviled the U.S. economy in the 1970s. Average hourly earnings of all private-sector employees rose by an annual 5.7 percent in January, which was the highest on record with the exception of a sharp, one-month increase in wages in April 2020. That’s when millions of relatively low-paid workers lost their jobs while their relatively high-paid counterparts remained employed, with the structural shift in employment composition leading to a boost in average wages.
In her speech, Mester touched on the risk of a wage-price spiral, saying that if longer-term inflation expectations become de-anchored, price pressures could stay elevated for even longer.
“Allowing inflation to remain at high levels can lead firms, households, and financial market participants to expect higher inflation over the longer term. A rise in longer-term inflation expectations could then spill over into wage- and price-setting dynamics, leading to even more persistent inflation,” she said.
By Tom Ozimek
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