Rise to 7.0 percent: Highest inflation in the US since 1982

As of: 01/12/2022 6:40 p.m

Everyday life is becoming more and more expensive not only for Europeans, but also for Americans: In December, US consumer prices rose by seven percent. Has the climax now been reached?

Whether it’s for rent, a used car or even Christmas presents – many Americans had to dig deep into their pockets in December. In the final month of 2021, consumer prices rose a whopping 7.0 percent, according to the U.S. Department of Labor. This is the highest increase in almost 40 years. In November, the inflation rate was still 6.8 percent. However, economists had expected the price increase to be of this magnitude.

Highest annual inflation since 1990

The prices for used and new cars rose particularly sharply. Overnight stays in hotels also cost significantly more. There was only some relief in energy prices: oil and fuel prices fell. The much-watched core rate, which excludes volatile energy and food prices, rose to 5.5 percent from 4.9 percent in November. Economists had predicted an increase of just 5.4 percent. Overall, the inflation rate was 4.7 percent in the past year: it reached its highest level since 1990.

Inflation data increases pressure on Fed. Because the overall rate is well above their inflation target of two percent, the US Federal Reserve must act quickly. The currency watchdogs had already announced several weeks ago that they would withdraw from their bond purchases to support the economy by March. In addition the Fed is planning an interest rate turnaround soon. Recently there has been speculation that it will come sooner than planned. Some Fed members spoke out in favor of a first rate hike as early as March. Fed President Jerome Powell left open yesterday at the hearing in the Senate when exactly the first rate hike should take place. The markets are now expecting at least three rate hikes this year.

peak reached?

Whether inflation has now peaked or whether it will continue to rise in early 2022 is a matter of debate among economists. “The inflation rate should still not have reached its peak,” says economist Christoph Balz from Commerzbank. However, he only expects slightly higher rates in the next few months, as the boost from energy prices will subside.

Thomas Gitzel, chief economist at VP Bank, is preparing for lower inflation rates. “In the coming months, the US inflation rate will go into reverse gear, even without any action from the US Federal Reserve,” he believes. The dwindling base effect in energy prices alone is responsible for this. “So it’s not a question of whether inflation rates will fall, but at what levels they will level off.”

Wage increases continue to put downward pressure on prices

In the opinion of Dirk Chlench from Landesbank Baden-Württemberg, the upward trend in prices will decrease somewhat over the course of the year as a result of the expiring special effects of Corona and the absence of further oil price increases. “However, given the low unemployment rate, accelerated wage increases are likely to stand in the way of a significant relaxation on the price front.” For 2022 as a whole, he expects consumer prices to rise by 5.0 percent.

In the FX market, the US dollar came under pressure following the release of the data. The dollar index, which tracks rates against major currencies, fell 0.6 percent to a two-month low of 95.087. The euro strengthened, hitting a daily high of $1.1415. US Treasury bond prices rose.

The stock exchanges reacted calmly to the high inflation. On Wall Street, the US standard index Dow Jones advanced by 0.1 percent. The DAX rose by 0.4 percent. “Seven percent inflation, so what?!” Asked analyst Konstantin Oldenburger from the online broker CMC Markets. “The data only confirmed market expectations that the US Federal Reserve will hike interest rates in the near future.”

5.3 percent higher inflation in Germany

For comparison: In Germany, consumer prices rose by 5.3 percent in December and thus more strongly than at any time since 1992. On average for 2021, the inflation rate was 3.1 percent. This is the highest increase in over 28 years. Although economists expect consumer prices to relax slightly at the beginning of the new year due to the base effect, inflation is likely to remain high in the long term. “It’s time for the European Central Bank (ECB) to take its foot off the gas,” said Commerzbank chief economist Jörg Kramer. The ECB still considers high inflation to be a temporary phenomenon.

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