US consumer prices post biggest rise in nearly 40 years; inflation close to peaking

US consumer prices increased solidly in December as rental accommodation and used cars maintained their strong gains, culminating in the largest annual rise in inflation in nearly four decades, which bolstered expectations that the Federal Reserve will start raising interest rates as early as March.

The report from the Labour Department on Wednesday followed on the heels of data last Friday showing that the labor market was at or near maximum employment.

Fed Chair Jerome Powell on Tuesday said the US central bank stood ready to do what was necessary to keep high inflation from becoming "entrenched," in testimony during his nomination hearing before the Senate Banking Committee for a second four-year term as head of the bank.

The high cost of living, the result of snarled supply chains because of the Covid-19 pandemic, is a political nightmare for President Joe Biden, whose approval rating has taken a hit.

"The Fed is going to be forced to begin raising rates in March and depending on the political pressure on them - from both sides of the aisle - they are going to have to raise rates four or more times in this year and potentially more than that next year," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina.

The consumer price index rose 0.5 per cent last month after advancing 0.8 per cent in November. In addition to higher rents, consumers also paid more for food, though the 0.5 per cent increase in food prices was less than in the prior three months. There were big gains in the prices of fruits and vegetables, but beef prices fell 2.0 per cent after recent sharp gains.

Consumers also got a respite from gasoline prices, which fell 0.5 per cent after rising 6.1 per cent in both November and October.

In the 12 months through December, the CPI surged 7.0 per cent. That was the biggest year-on-year increase since June 1982 and followed a 6.8 per cent rise in November.

Last month's inflation readings were in line with expectations. Rising inflation is also eroding wage gains. Inflation-adjusted average weekly earnings fell 2.3 per cent on a year-on-year basis in December.

President Biden said virtually every nation was afflicted with inflation as the global economy recovers from the pandemic.

"This report underscores that we still have more work to do, with price increases still too high and squeezing family budgets," Biden said in a statement.

Inflation is well above the Fed's flexible 2 per cent target. It is also being lifted by budding wage pressures as the labor market tightens. The unemployment rate fell to a 22-month low of 3.9 per cent in December. Markets have priced in an about 80 per cent chance of a rate hike in March, according to CME's FedWatch tool.

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Economists say the broad nature of inflation appears to have caught Fed officials off guard. There are concerns that inflation expectations could become entrenched and compel the Fed to aggressively tighten monetary policy, potentially causing a recession.

"This is the first time the Fed has chased instead of trying to preempt a nonexistent inflation since the 1980s," said Diane Swonk, chief economist at Grant Thornton in Chicago. "Brace yourselves."

Stocks on Wall Street were trading higher amid relief that the increase in prices was as expected. The dollar fell against a basket of currencies. US Treasury prices rose.

• Americas