US inflation
(Source: U.S. Labor Department)

US annual inflation rate hits 40-year high

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The annual inflation rate in the US accelerated to a fresh four-decade high in January the Labor Department revealed on Thursday (Feb. 10). The highly anticipated report showed consumer prices last month were up by 7.5% compared to January 2021, reflecting the fastest annual growth since February of 1982.

The inflation figure beat consensus expectations which had predicted a 7.2% increase and reinforces the Federal Reserve’s decision to begin raising borrowing rates across the economy. The US central bank has announced three price increases for 2022, with the first to begin in March.

Inflation has been above 5% for the past eight months as the cost of living crisis continues to hurt Americans. Soaring energy costs, labour shortages, and supply disruptions coupled with strong demand weigh.

Energy remained the biggest contributor (27% vs 29.3% in December), led by gasoline prices which soared by as much as 40% (49.6% in December).

Inflation expanded for shelter (4.4% vs 4.1%); food (7% vs 6.3%), namely food at home (7.4% vs 6.5%); new vehicles (12.2% vs 11.8%); used cars and trucks (40.5% vs 37.3%); and medical care services (2.7% vs 2.5%).

“There will be plenty of persistence from soaring house prices pushing shelter costs this year,” said Sal Guatieri, senior economist at BMO, in a note to clients.

The “core” consumer price index (CPI), minus the more volatile food and energy indices, rose 6.0%, the most since August of 1982.

“With core CPI inflation hitting a new high of 6.0%, there was little to cheer about in the rest of the report” Andrew Hunter, senior U.S. economist for Capital Economics, wrote in a note.

“The acceleration in rent of shelter inflation shows no sign of abating, with owners’ equivalent rent up by 0.4% m/m again and rent of primary residence seeing an even bigger 0.5% gain. Alongside the 0.7% jump in food away from home prices, this underlines our view that a rapid cyclical acceleration in inflation is underway and, with labor market conditions exceptionally tight, it is unlikely to abate any time soon.”

When measured from December to January, inflation was 0.6%, the same as the previous month and more than economists had predicted.

There are few signs that inflation will slow significantly anytime soon. The question is how long consumers can stomach the price increases.

High inflation also proved to be politically problematic for President Joe Biden and congressional Democrats as midterm elections loom later this year.

US stocks slid after red hot inflation data. The Dow Jones Industrial Average tumbled 0.74%, or 274 points, at the open. The S&P 500 dropped 1.23% while the Nasdaq 100 plummeted 1.89% at the same time.