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According to Personal Consumption Expenditure (PCE) data
from the Bureau of Economic Analysis, US inflation hit a 40 year high
of 5.8 percent year-over-year in December. When stripping out volatile
food and energy prices, Core inflation (the inflation metric preferred
by the Federal Reserve) rose to 4.9 percent year-over-year - also a
multi-decade high. Some reports suggest that inflation rates may have
peaked and will begin to decline in January, but this is unlikely.
While month-over-month growth in headline PCE prices slowed in
December, Core PCE prices rose for a third consecutive month. Falling
food and energy prices were responsible for the difference in these two
trends in December, which suggests that inflationary momentum has
become more deeply rooted in the US economy. As we look to January
there two reasons to be concerned about inflation readings. Firstly,
new COVID-19 infections skyrocketed – impacting staffing levels, supply
chains, and transportation activity. These disruptions create shortages,
which in turn drive prices for goods and services higher. Secondly,
easing food and energy prices ceased or, in some cases, rebounded in
January. Both crude oil and natural gas prices, for instance, rose for
the month. These two trends are likely to result in an increase in both
Core PCE inflation and headline PCE inflation in January.
Regardless of the precise peak date, inflation will remain elevated
throughout 2022 and into 2023. Coupled with an increasingly hawkish
monetary policy, the overall impact on businesses and consumers should
result in slower economic growth.
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