Rajkotupdates.news : US inflation jumped 7.5 in in 40 years; In January 2021, US inflation in the United States was 7.5% in annual terms. This was reported by The Wall Street Journal, citing data from the Department of Labor. The US consumer price index rose to its highest level in almost four decades. The fight against inflation will be a top priority for the US Federal Reserve, so the regulator will actively raise the rate this year
Annual inflation in the United States accelerated to 7% in December 2021, according to data from the US Department of Labor. This is the highest value in almost 40 years – the last time at this level the indicator was recorded in 1982.
A report published on Rajkotupdates.news shows, the acceleration of inflation has caused an imbalance in supply and demand in the context of the pandemic. According to the publication, the rise in prices will weaken and demand will normalize when the business gets used to the new realities. However, it is not known when the supply issue will be resolved so that the pressure on prices will decrease.
Meat, eggs and citrus prices continue to rise in the US, but there are signs of a slowdown in energy prices. In turn, an increase in oil prices will increase the cost of gasoline.
“Raising rates will do nothing to address supply chain tensions and labor shortages, but it could help cool the economy somewhat and allow supply and demand to begin to rebalance through weaker growth,” said James Knightley, chief international economist at ING.
The publication indicated that the rise in inflation could be affected by a jump in US GDP in 2021 (+ 5.5%) and a strong labor market. Over the past three months, employers have created 1.6 million jobs, which has led to a 4.5% increase in wages. These are record numbers since 2002.
Analysts polled by Refinitiv
Analysts polled by Refinitiv had expected annual inflation to accelerate to 7%. In November 2021, the indicator reached 6.8%, the highest level in 39 years. US inflation is well above the Fed’s long-term target of 2%.
According to analysts, inflation in the United States is accelerating, among other things, due to the armed conflict in Ukraine, which has driven up prices for energy resources, as well as for vegetable oil, grain, and flour.
Federal Reserve Chairman Jerome Powell said on Tuesday that the fight against inflation will be an absolute priority for US financial authorities. To do this, the regulator plans to continue reducing stimulus programs and start raising rates in order to avoid overheating the economy. “If we have to raise the interest rate even more over time, we will do it. We will use the tools at our disposal to bring down inflation,” Powell said at a hearing in the US Senate on January 11.
He also announced plans to normalize monetary policy as early as 2022: “This year, I expect the Fed to raise rates, end asset purchases, and possibly allow the balance sheet to start shrinking later.”
The long-term goal for the American regulator is to reduce inflation in the US to 2% and reduce unemployment to 2%. In December, unemployment in the United States fell below 4% for the first time since the start of the pandemic. Powell believes that the US labor market is recovering very quickly, but inflationary pressures, in his opinion, will only ease by mid-2022. In his opinion, this will happen as problems with the supply chains of goods and labor shortages ease.
Effects on US Economy
In March 2020, amid the effects of the coronavirus pandemic, the Fed lowered the rate to 0-0.25% per annum. In addition, the regulator began to buy bonds, increasing the amount of free money in the market. Until November 2021, the Fed was buying back US Treasuries and mortgage bonds from the market for $120 billion monthly. In November 2021, the regulator announced that it would begin reducing bond buybacks by $15 billion every month from November. Since January, the Fed has begun phasing out its asset buyback program twice as fast, by $30 billion a month. At this rate, it will end in March 2022.
An improvement in the US labor market and signals of a possible rate hike in the minutes of the Fed meeting on December 14-15 suggests that the tightening of monetary policy will be faster than previously expected, according to Goldman Sachs. According to the forecasts of Goldman Sachs analyst Jan Hatzius, this year the Fed will raise interest rates at least four times (at meetings in March, June, September and December) and begin the process of reducing its balance sheet (or the so-called “quantitative tightening” – QT) in July of this year, or even earlier. Shrinking the Fed’s balance sheet will result in liquidity being withdrawn from the financial system.
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