The US Consumer Price Index is at its highest point in almost 40 years.

Image source, EPA

Prices are increasing at an alarming rate in the US, and inflation is up by 7% in December.

The strong demand for cars and the limited supply of key products are driving these increases. This is putting pressure upon policymakers to take action.

Expect the US central bank to increase interest rates in this year.

The increase in borrowing costs is designed to decrease demand and make purchases like cars more expensive.

With December’s rise, it was the third consecutive month when the US annual inflation rate hovered over 6%. That is far above the policymakers’ target of 2%. Inflation slowed to an alarming pace in 1982, when it was at its highest level.

The cost of housing increased 4.1% in the past year, and groceries prices rose 6.5%. This compares to an average annual increase of 1.5% over the past 10 years.

The Labor Department’s Wednesday report showed some signs of an easing in pressures.

From November to December, the cost of energy fell by 0.4% – it was its first decrease since April. However, energy prices have risen by almost 30% over the past 12 months and are now on an upward trend.

Capital Economics’ chief economist Paul Ashworth said that December’s inflation report is “every bit as bad” as he expected.

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The impact of US-related price pressures has been noticed in different parts around the world.

Organisation for Economic Cooperation and Development is a group that represents over 30 of the largest economies in the world. It reported this week, saying that inflation among its members has reached its highest level in 25-years in November.

Additional rises

According to the World Bank, the UK’s inflation reached a 10 year high in November. However, global prices have been rising at a faster pace than 2008 and are expected to continue increasing.

Many countries face higher energy and food costs. However, inflation has been unusually high in the USA.

This is partly due to the strong demand from household, whose spending received a boost by government coronavirus assistance and changed suddenly from travel to furniture during this pandemic.

The US’s first economic experts believed the price pressures would decrease as the pandemic subsided. The price hikes are more stubborn than predicted due to ongoing production delays and the advent of viruses.

Jerome Powell (head of America’s central banking), told Congress Tuesday that it was more challenging than they had expected to stop the pandemic.

Sarah House of Wells Fargo economist said it was unlikely that inflation would naturally decrease as the pandemic subsides. This is due to worker shortages as well as wages which have been increasing but not as rapidly as prices.

She stated that “even though the extraordinary pace of goods inflation, momentum in shelter cost inflation are still solidly rooted in pandemic”, but the tightening labour market and subsequent wage pressures will make inflation difficult to recover on its own.

The Biden administration has felt the pressure and it is now threatening consumer confidence, even though there are other indicators of a strong economy.

Powell promised to lower inflation by increasing interest rates. However, Powell warned that these moves will not be enough to solve the problem if supply chains issues continue to persist. He also pointed to potential risks associated with new Chinese shutdowns.

He stated that Omicron, especially China’s no-Covid policy can disrupt supply chains again.

China released its official inflation statistics on Thursday. They showed that consumer and producer prices increased 1.5%, respectively.

However, that ease isn’t necessarily a sign of what might happen elsewhere. Gian Maria MilesiFerretti, senior associate at Brookings Institution in Washington, stated, “But that easing doesn’t necessarily mean it will occur elsewhere.”

“Indicators for what’s happening [in China]He said, “Those are the more important indicators.”


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