December consumer prices are expected to be hot, but the peak could come soon

A used car dealership is seen in Annapolis, Maryland on May 27, 2021 as many car dealers across the country are running out of new vehicles as a shortage of computer chips has nearly halted production for many vehicle manufacturers.

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A key measure of consumer prices is expected to show that consumer inflation peaked in December, the biggest price increase since the early 1980s.

Economists expect consumer prices to rise 0.4% in December and 7% year-on-year, according to Dow Jones. This compares to a 0.8% jump in November, or a 6.8% year-over-year gain, the highest since 1982.

Excluding food and energy, the CPI is expected to have risen 0.5% or 5.4% year over year, when the Labor Department releases the data Wednesday at 8:30 a.m. ET.

“Over the next two months we believe inflation will have peaked, in December or in the first quarter,” said Luke Tilley, chief economist at Wilmington Trust. “We expect inflation to slow down in 2022. We expect prices to rise more slowly in 2022 than in 2021. We don’t have the same stimulus. We expect lower spending and chain problems to increase. supply will not be fully resolved. resolved, but we believe we are past the peak of some of these shipping supply chains. “

Economists disagree on exactly when inflation will peak, but it was well beyond the initial period that the Federal Reserve expected to see when it called inflation “Transient” or temporary. The Fed is now forecasting three quarter-point interest rate hikes this year to fight inflation.

“It’s always hot, hot, hot, and that’s important because we are now where the Fed is concerned that that 7% figure is built into wages and takes root further,” said Diane Swonk, economist. in chief at Grant Thornton. “You have the Fed in a panic instead of being in patient mode, so the risk is overtaking… We are now in a position where the Fed is chasing instead of anticipating. It’s worrying. “

The Fed’s tools to mitigate price hikes

Federal Reserve Chairman Jerome Powell told a Senate panel on Tuesday that the central bank would use its tools to dampen price hikes if it saw more persistent inflation.

“If we see inflation persist at high levels for longer than expected, then if we need to raise interest more over time, we will,” said Powell. “We will use our tools to recover inflation.”

Inflation data has repeatedly surprised on the upside. Economists say there is a risk for an even faster pace in Wednesday’s report.

“If it gets warmer than expected, it’s kind of a validation of the path the Fed has already gone on,” Tilley said. Besides raising interest rates, Powell said on Tuesday that the central bank could start reducing its balance sheet this year, another step towards tighter policy.

Watch for rising rents and “more rigid” increases

Kevin Cummins, chief US economist at NatWest Markets, said the peak in overall consumer inflation could be this month, and he notes that the composition of inflation this year is changing. .

“Last year it was all on the goods side. We saw a recovery in basic goods in our forecast. We have seen it shift away from used cars and commodity prices. Now that is shifting towards more rigid rents, ”he said. “We have a sort of inflation that is holding around 3% this year in part because of rents and also broader wage pressures building up because the job market is getting as hot as it is.”

Cummins expects the CPI to rise 3% by the end of the year. He said rents have gone up over the past two years. Rental costs, along with hotel costs and owners’ equivalent rent, make up the housing component of the Consumer Price Index and account for around 30% of the overall CPI, he noted. .

For 2022, Cummins expects rents to increase 4.5% year-on-year, after increasing 3.4% in 2021. In 2020, the pace of rent increases slowed to 1.9% from 3.3% in 2019, he noted. He said rents are expected to increase even more in 2023.

“Being that he’s got such a huge weight, those CPI numbers are going to stay pretty high,” Cummins said.

Carol N. Valencia