- The consumer price index is released by the Labor Department Wednesday and is expected to show headline inflation jumped by 7%, its fastest pace since 1982.
- The Federal Reserve is already on a path to raise interest rates to battle rising prices. A hot number should justify the Fed's policy shift.
- "It's still hot, hot, hot, and it's important because we're now where the Fed worries about that 7% number getting baked into wages and getting more entrenched," said Diane Swonk, chief economist at Grant Thornton.
A key measure of consumer prices is expected to show that inflation at the consumer level spiked in December, the hottest increase in prices since the early 1980s.
Economists expect the consumer price rose 0.4% in December, and 7% on a year-over-year basis, according to Dow Jones. That compares to a 0.8% jump in November, or a 6.8% gain year-over-year, the highest since 1982.
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Excluding food and energy, CPI is expected to have risen 0.5% or 5.4% year-over-year, when the Labor Department releases the data Wednesday at 8:30 a.m. ET.
"Sometime in the next couple of months, we think inflation will have peaked, in December or some time in the first quarter," said Luke Tilley, chief economist at Wilmington Trust. "We do expect inflation to slow in 2022. We expect prices to go up more slowly in 2022 than they did in 2021. We don't have the same stimulus. We expect some weaker spending and supply chain issues are not going to be fully resolved, but we think we have passed the peak in some of those shipping supply chains."
Economists disagree on exactly when inflation will peak, but it's well past the initial time frame the Federal Reserve had expected to see when it dubbed inflation "transitory" or temporary. The Fed now forecasts three quarter-point interest rate hikes this year to battle inflation.
"It's still hot, hot, hot, and it's important because we're now where the Fed worries about that 7% number getting baked into wages and getting more entrenched," said Diane Swonk, chief economist at Grant Thornton. "You've got the Fed in panic instead of patient mode, so the risk is overshooting... We're now in a position of the Fed chasing instead of anticipating. It's worrisome."
The Fed's tools to mitigate rising prices
Federal Reserve Chairman Jerome Powell Tuesday told a Senate panel that the central bank will use its tools to mitigate rising prices if it sees more persistent inflation.
"If we see inflation persisting at high levels longer than expected, then if we have to raise interest more over time, we will," Powell said. "We will use our tools to get inflation back."
Inflation data has repeatedly surprised to the upside. Economists say there's a risk for an even faster pace in Wednesday's report.
"If it's hotter than expected, it's kind of a validation of the path the Fed has already put themselves on," said Tilley. Besides raising interest rates, Powell said Tuesday that the central bank could begin to shrink its balance sheet this year, another step toward tighter policy.
Watch for rising rents and 'stickier' increases
Kevin Cummins, chief U.S. economist at NatWest Markets, said the peak in consumer headline inflation could be this month, and he notes the make-up in inflation this year is shifting.
"Last year, it was all on the goods side. We saw a pick-up in core goods in our forecast. We have it shifting from used cars and commodity prices. Now it's shifting toward rents which are stickier," he said. "We have inflation kind of holding in around 3% this year partly because of rent and also broader wage pressures that are building because the labor market is getting as hot as it is."
Cummins expects CPI to be rising at 3% by the end of the year. He said rents have been climbing over the past two years. Rent costs, together with hotel costs and owners' equivalent rent are the shelter component of the consumer price index and are about 30% of headline CPI, he noted.
For 2022, Cummins expects rents to rise 4.5% year-over-year, after rising 3.4% in 2021. In 2020, the pace of rent increases slowed to 1.9% from 3.3% in 2019, he noted. He said rents should rise even more in 2023.
"Being that it has such a massive weight, those CPI numbers are going to remain pretty elevated," Cummins said.