US inflation still shows no sign of fading

Annual US inflation hit 7% in December, its highest since 1982, while core inflation rose to 5.5%. That suggests high price rises are going nowhere soon.

Jerome Powell
Jerome Powell: will this current spike look more like 1946 or 1966?
(Image credit: © OLIVIER DOULIERY/AFP via Getty Images)

“Another month, another inflation report that causes the words ‘highest rate since’ to appear in headlines,” says Dominic Pino for National Review. Annual US inflation hit 7% in December, the highest level since 1982. Core inflation – which strips out volatile food and energy prices – rose to 5.5% compared with a year before, a sign that inflation remains “broad-based”. Month-on-month, consumer prices rose 0.5%, down from 0.8% in November and 0.9% in October. “That is a meaningful slowdown, but we aren’t out of the woods yet.”

US “policymakers have spent months waiting for inflation to fade”, say Jeanna Smialek and Ana Swanson in The New York Times. Instead, a shortage of workers caused by isolating due to Omicron and new lockdowns in China risk sending another wave of disruption through global supply chains. At 7%, inflation may finally be close to its peak, but it will “take time to ease back”, says Omair Sharif of research firm Inflation Insights. “It is likely to end 2022 lower, but still above the near-2% level that policymakers prefer.”

The key question for Federal Reserve chair Jerome Powell is whether this inflationary spike looks more like “1946 or 1966”, says Greg Ip in The Wall Street Journal. The end of World War II “unleashed pent-up demand for consumer goods”. Inflation almost hit 20%, but then quickly subsided.

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By contrast, in the late 1960s rising prices heralded years of inflation ahead. The Fed failed to act quickly – “like today, the 1960s increase followed a long period of low, stable inflation and low unemployment”. That policy mistake paved the way for the stagflation that blighted the following decade.

US stocks sell off

Investors are positioning for four Federal Reserve interest rate rises this year, beginning in March. That helped send the yield on two-year US treasury bonds above 1% for the first time since February 2020.

Higher yields have weighed on previously high-flying tech stocks, says Jim O’Neill on Project Syndicate. The Nasdaq 100 index of leading tech shares is down 7% since the start of the year. The “five-day rule”, a piece of trader folklore, holds that the first five trading days of January set the tone for the next 12 months. Perhaps that heralds a weak spell for stocks. “After a remarkably strong performance in 2021, financial markets now seem to be coming to terms with the likelihood that fiscal and monetary policies will tighten in 2022.”

The FTSE 100 has enjoyed a better start to 2022, registering a small rise. The index’s bank stocks stand to gain from higher rates, while its miners offer a hedge against inflation through their ownership of real assets, says Russ Mould of AJ Bell. Energy and tobacco firms enjoy pricing power, a plus in times of rising costs. “The UK stockmarket may not be a bad place to be if inflation stays entrenched.”