Gasoline raises US consumer prices, inflation remains benign

WASHINGTON (Reuters) – US consumer prices rose sharply in December amid rising gasoline costs, although underlying inflation persisted as the economy battled a raging COVID-19 epidemic that weighed on the labor market and the service industry is.

Inflation, however, could temporarily accelerate this year as the government provides more money to stimulate the economy, and consumer prices soon fall out of the calculation of the coronovirus crisis.

But it is unlikely to have an impact on the Federal Reserve, which has indicated that it will tolerate higher prices after consistently lowering the US central bank’s 2% target to inflation. The Fed has raised interest rates to almost zero and is pumping money into the economy through asset purchases.

Economists expect the ultra-easy monetary policy stance to last at least 2024.

James Knightley, chief international economist at ING, said, “We are likely to see inflation coming to a catastrophic period in 2020 based on a reopened economy in 2021, but it faded by the second half of 2021 Will remain. ” in New York. “Long-term inflation is going to be driven mainly by the cost of wages, it is the economy of the service sector.”

The Consumer Price Index rose 0.4% last month after the Labor Department achieved 0.2% in November, the Labor Department said on Wednesday. The 8.4% jump in gasoline prices accounted for more than 60% increase in CPI. Food prices also rose. The rise of the CPI was in line with the expectations of economists.

In the 12 months to December, the CPI advanced 1.4% after rising 1.2% in November. The annual inflation rate in the last 10 years has been less than the 1.7% average.

(Graphic: Inflation -)

Higher prices may extend beyond the first half of 2021. A survey this month showed a measure of prices paid by manufacturers at 2–1 / 2-year highs in December due to supply chain bottlenecks. The Fed’s Beige Book report on Wednesday underlined the rising price pressure at the factory gate, “an increase in the continuity of finished goods and services due to input and growth in early January”.

The report also showed that businesses in many districts were able to pass on higher production costs to consumers, particularly in the retail, wholesale trade and manufacturing sectors, “and some planned to increase sales prices in the coming months.” Quoted. “

“Inventories are unusually slim for this early phase of the cycle and if the vaccination program is a success… then inflation could remain above 2%, or even in the second half of the year, due to increased demand. After the Spring Base Effect faded, ”said Paul Ashworth, Chief American Economist at Capital Economics in Toronto.

But with at least 19 million Americans on unemployment benefits, inflation is unlikely to be a hassle.

Excluding volatile food and energy components, CPI gained 0.1% in December after climbing 0.1% in November. The so-called core CPI was used to reduce the prices of cars and trucks, entertainment, airfare and healthcare.

It benefited from new motor vehicles, apparel prices, household goods, personal care products and automotive insurance prices.

On a year-on-year basis, the core CPI grew by 1.6% over the November rise and is below the average of 2.0% over the past 10 years. The Fed tracks the main personal consumption expenditure (PCE) price index for its inflation target, a flexible average. The core PCE price index stands at 1.4%.

The service sector, which accounts for more than two-thirds of the US economy, has been hit hardest by the virus.

Stocks traded higher on Wall Street. A basket of currencies was received in dollars. US Treasury prices rose.

Muted

The government approved approximately $ 900 billion in additional epidemic relief in late December. More fiscal stimulus is expected from the incoming administration and Congress of President-Elect Joe Biden, which will soon be controlled by Democrats.

Biden, who is sworn in next Wednesday, is expected to unveil a plan this week that will include relief for cash-strapped state and local governments for people who have lost their jobs or cannot pay rent and direct Will pay $ 2,000 in cash payments. For many Americans.

Economists have advanced their growth projections for this year and US Treasury yields rose in anticipation of stronger economic growth in the second half of the year.

Gasoline prices fell two straight monthly after last month’s rebound. Food prices rose 0.4%, as well as home consumption rose 0.4%. Prices of food eaten away from home also rose by 0.4%.

The rent equivalent to the owners of the primary residence, which a homeowner receives from renting or renting a house, increases by 0.1% after remaining unchanged in November. Many tenants have forcibly entered into agreements with landlords. Healthcare prices fell for the third consecutive month.

“For the Fed, the biggest inflation concern over the next few years will be inflation that is too low, not too high”, said Gus Focher, chief economist at PSC Financial of Pittsburgh, Pennsylvania.