Inflation Still Running Hot in December Ahead of Fed’s Move to Hike Interest Rates | Economy

A key measure of Inflation followed closely by the Federal Reserve showed Friday that prices rose at an annual rate of 5.8% in December, driven by a nearly 30% hike in energy costs, the Commerce Department reported.

Excluding energy and food, the core personal consumption expenditures index rose 4.9% annually. Both the overall and core indices rose at a higher rate than in November,

Incomes, meanwhile, increased 0.3% for the month, fueled by higher wages, but spending fell 0.6% as consumers reduced their purchases of goods such as vehicles, furniture and other long-lived items.

The reading reflects conditions before the Fed announced on Wednesday its plan to raise interest rates as early as March. That is meant to put a brake on runaway inflation that is surging at the highest pace since the 1980s.

Other data has begun to show a slight decline in economic activity, though from a very high level. On Thursday, the government said in its first estimate of fourth-quarter growth that the nation’s gross domestic product soared 6.9% annually. Much of that increase was the result of companies restocking inventories.

The key question for the economy this year will be how it weathers a change in the monetary policy regime from the era of easy money that has dominated the economy and the markets for years. While most economists are hopeful for 2022, some have warned the Fed may have waited too long to rein in its accommodative policy. The stock market has been selling off recently, with high-flying stocks like Netflix, Nvidia and Tesla bearing the brunt of the drop.

“The GDP report has three key implications for the outlook,” Comerica Bank Chief Economist Bill Adams wrote on Thursday. “First, the big bump to inventories means fewer shortages, fewer delivery delays, and less related inflationary pressure in 2022. This is already showing up in the big drop in the supplier deliveries components of [the Institute for Supply Management’s] surveys of purchasing managers, which showed notably fewer delivery delays in December than earlier in 2021.”

“Second, services spending remains very sensitive to coronavirus cases even though most American adults are vaccinated,” Adams added. “Services spending growth looks to be slowing even more in the first quarter of 2022 due to the omicron wave. Third, inventory restocking will stay a tailwind for growth in the first half of 2022. Even amid the fourth quarter’s big build in inventories, the economy-wide inventory-to-sales ratio was historically low.”

After an annual growth of 5.7% in 2021, Adams sees GDP slowing to about 4% this year, but it will still be “well above the economy’s long-run potential growth rate of 1.5-2.0%.”