U.S. consumer prices post largest annual gain in 40 years

A barista makes coffee for a customer in Houston, Texas, U.S., March 10, 2021. REUTERS/Callaghan O’Hare/File Photo/File Photo

WASHINGTON, Feb 10 (Reuters) – U.S. consumer prices rose solidly in January, leading to the biggest annual increase in inflation in 40 years, fueling financial markets speculation for a 50 basis points interest rate hike from the Federal Reserve next month.

The broad increase in prices reported by the Labor Department on Thursday was led by soaring costs for rents, electricity and food, and could heap more political pressure on President Joe Biden, whose popularity has been declining amid anxiety over the rising cost of living.

High inflation has overshadowed a strong economy, which grew at its fastest pace in 37 years in 2021 and a labor market that is rapidly churning out jobs.

“While this report, on its own, might not trigger a 50 basis points inaugural rate hike from the Fed, the pressure will continue to mount if inflation doesn’t begin to rollover this spring as policymakers anticipate,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

The consumer price index gained 0.6% last month after a similar increase in December. The food index rose 0.9%, with the cost of food consumed at home increasing 1.0%. There strong increases in the prices of cereals and bakery products, dairy, fruits and vegetables. Meat prices rose moderately.

Electricity prices jumped 4.2%, offsetting a 0.8% decline in the cost of gasoline and a 0.5% drop in natural gas.

In the 12 months through January, the CPI jumped 7.5%, the biggest year-on-year increase since February 1982.

That followed a 7.0% advance in December and marked the fourth straight month of annual increases in excess of 6%. Economists polled by Reuters had forecast the CPI rising 0.5% on month and accelerating 7.3% on a year-on-year basis.

Effective with the January report, the CPI was re-weighted based on consumer expenditure data from 2019-2020.

The economy is grappling with high inflation, caused by a shift in spending to goods from services during the COVID-19 pandemic. Trillions of dollars in pandemic relief fired up spending, which ran against capacity constraints as the coronavirus sidelined workers needed to produce and move goods to consumers.

U.S. stocks opened lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.

EYES ON THE FED

The Fed is expected to start raising rates in March to rein in inflation, which has overshot the U.S. central bank’s 2% target. Financial markets are predicting nearly even odds of a 50 basis points increase, according to CME’s FedWatch tool.

Market predictions are partly driven by the fact that price pressures are broadening, with several measures of wage inflation increasing strongly in recent months.

Economists, however, believe it is unlikely that the Fed would move so aggressively. They expect the central bank to…