The Labor Department released inflation figures for December which showed that prices rose 7% compared to last year. This marked the highest level of inflation since 1982.
It also comes at a time when inflationary concerns are increasing, and the Federal Reserve is in the midst of a hawkish pivot with even usually dovish members calling for rate hikes and a focus on inflation.
This figure was in line with economists' consensus expectations. Initially, the market had a bullish reaction to the numbers, and there was some follow-through from the previous day's rally. However, this quickly fizzled, and stocks gave up the bulk of their gains with the most damage in interest-rate sensitive sectors like growth stocks. Maybe the best example is Cathie Wood's Ark Innovation ETF
On a monthly basis, CPI rose 0.5% which was slightly higher than expectations of a 0.4% increase. Core CPI, which excludes food and energy, came in at 5.5% on an annual basis and 0.6% on a monthly basis.
Some of the oft-mentioned factors for this price rise are strong demand, huge amounts of liquidity pumped through the economy via the Fed and Congress' stimulus payments, a shortage of workers, and supply chain challenges.
It also seems that the 'transitory vs entrenched' debate is pretty much over as it's no longer possible to call inflation transitory. Even if some of the aberrations caused by the pandemic like used car prices recede, other factors are starting to rise like oil prices and rents which are more "sticky".
Shelter costs, which make up nearly one-third of the CPI increased 0.4% for the month and 4.1% for the year. It was the fastest pace since February 2007. Used vehicle prices rose 3.5% and are now higher by 37% on an annual basis.
Another challenge for the economy is that inflation is eroding gains made by workers. Although, wages have been rising, for many workers, the gains have been crowded out by inflation which means that for many people, wages are down on a real basis.
Another issue is that the recent omicron wave, despite being milder than previous waves, is leading to lockdowns in parts of Asia, crippling ports and the transportation sector due to fewer workers being available which means that inflationary pressures are unlikely to recede soon.
Given these developments, it's not surprising that the Fed is looking to raise rates soon and is even considering reducing the size of its balance sheet. According to Fed fund futures, there is an 80% chance of a rate hike in Q1 and a 50% chance of 4 hikes in 2022. Many have already started calling for a hike in March given the severity of the situation.
