US inflation expected to reach its fastest pace in almost 40 years

US consumer price growth is expected to have risen at the fastest pace in almost four decades in December, as the Federal Reserve worries about the threat of elevated inflation and its consequences for the economic recovery.

The consumer price index (CPI) is estimated to have increased at a 7 per cent annual clip last month, a step up from the 6.8 per cent rate registered in November, according to a consensus forecast compiled by Bloomberg.

However, month-over-month price gains are expected to have moderated to 0.4 per cent between November and December, down from 0.8 per cent in the previous period. The data will be released at 8.30am Eastern time on Wednesday.

“Core” inflation, which strips out volatile items such as food and energy, is expected to have accelerated by an even larger magnitude compared with the last reading. Economists forecast core CPI will have jumped to 5.4 per cent, well above the earlier 4.9 per cent annual pace. That translates to another monthly increase of 0.5 per cent.

The new data come just a day after Jay Powell, chair of the US Federal Reserve, warned high inflation was a “severe threat” to the labour market recovery and affirmed the central bank’s intentions to rapidly reduce its monetary policy support.

Senior officials have begun to sketch out their plans to raise interest rates from their near-zero levels once they reach their dual goals of maximum employment and inflation that averages 2 per cent over time.

December’s data is expected to show further signs that inflation is picking up in a broader cross-section of the economy and is at greater risk of becoming entrenched.

The inflation reading for December is expected to put pressure on the Biden administration over its management of the economy heading into the 2022 midterm elections. While the US president has presided over a booming economy that created more than 6m jobs last year while the unemployment rate fell to 3.9 per cent, the perception of a strong recovery has been undermined by the spike in prices and supply chain disruptions.

“This is obviously an area of real challenge . . . Americans feel the price squeeze,” a senior White House official told the Financial Times. “While projections expect moderation [of inflation] across the year, the president and the administration are focused and trying to pull that forward as much as possible.”

The White House has been trying to reduce bottlenecks at key ports, crack down on anti-competitive behaviour in certain markets such as the meat industry and encourage more oil production globally to reduce petrol prices. It has refrained from adopting other inflation-fighting measures, however, such as removing tariffs on Chinese imports.

Coupled with recent progress in the jobs market — with the unemployment rate plummeting below 4 per cent and wage gains picking up amid a near-record shortfall of workers — economists now expect the Fed to raise interest rates in March, with two or three more adjustments occurring later in the year.

The Fed has also signalled its willingness to begin reducing the size of its $9tn balance sheet at some point in 2022 by no longer reinvesting the proceeds from its maturing Treasuries and agency mortgage-backed securities.

This process, called run-off, was likely to happen “sooner and faster” than when the central bank last attempted to pare down its portfolio in 2017, Powell said on Tuesday.

No firm plans have yet been decided on when the balance sheet may begin to shrink and how quickly the Fed could proceed.

Raphael Bostic, president of the Atlanta Fed, on Tuesday said he supported the balance sheet declining by at least $100bn each month after the first expected interest rate increase in March. At least two more interest rate adjustments would be appropriate in 2022, he said.

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