What economists are saying about the highest inflation in nearly 40 years

U.S. consumer prices rose at their fastest rate in nearly four decades in December, with inflationary pressures rippling through the economy as supply chain bottlenecks persisted alongside elevated demand.

The Bureau of Labor Statistics' December Consumer Price Index (CPI) posted a 7.0% year-over-year increase at the end of 2021 in the fastest increase since 1982. This matched consensus estimates, based on Bloomberg data, but accelerated from November's 6.8% increase. On a month-over-month basis, consumer prices rose 0.5% in December, or slightly more than the 0.4% rise expected, to mark an 18th consecutive month of price increases.

In response to this report, many economists acknowledged the decades-high surge in prices, but looked ahead to a moderation in the pace of price increases this year. Others suggested the latest report would further prompt the Federal Reserve to move more quickly and aggressively than previously anticipated to rein in rising prices.

Here were some of the main takeaways from economists' commentary about the latest inflation data.

'Demand is showing very little let-up'

According to Rick Rieder, BlackRock’s chief investment officer of global fixed income, the CPI report shows an unusual willingness by consumers to continue paying for increasingly pricey goods and services.

"It is a very rare time in history, in fact, most people operating in markets haven’t seen this sort of demand outstripping supply in the real economy in their careers, with some areas seemingly depicting a dynamic suggesting that 'price is no object,'" Rieder said in an email.

"Clearly, inflation has been escalating for a number of months due to shortages of supply in areas such as housing, commodities, semiconductors, new and used cars, etc., and those supply shortages are mostly still in place today," he said. "Remarkably, though, demand is showing very little let-up despite these prices staying sticky high, with the rapid transmission of the Omicron variant of the virus making a return to normalcy a more extended process."

He added that he doesn't expect to see "any let-up for a few months" in rising prices, while adding these trends may begin to ease into spring and summer this year.

'Pressure on the Fed'

With headline CPI inflation still climbing on an annual basis, the latest report will vindicate Federal Reserve officials' recent messaging and allow them to move more quickly to raise rates, end their asset purchase tapering program and, eventually, start drawing down the central bank's nearly $9 trillion balance sheet, according to a number of economists. Just earlier this week, Fed Chair Jerome Powell said during a hearing before the Senate Banking Committee that, “If we see inflation persisting at high levels, longer than expected, if we have to raise interest rates more over time, then we will."

"Today’s number will increase pressure on the Fed to get monetary policy tightening off the starting block," Seema Shah, chief strategist at Principal Global Investors, wrote in an email.

And indeed, for many economists, the latest inflation data reinforce that the Fed will need to raise rates four times this year, compared to the three rate hikes previously telegraphed in the central bank's last Summary of Economic Projections from December.

"Overall, the breadth of the inflation supports our call for four Fed hikes this year, along with the start of quantitative tightening," Bank of America economists led by Aditya Bhave wrote in a note. "Core inflation is likely to peak in March 2022, after which the [year-over-year] comparisons will turn highly unfavorable. But the key question is where core inflation lands in the medium term. And increasingly the risks are that it will land closer to 3% than the Fed's 2% target."

Others offered a similar view.

"Persistent high inflation rates together with the recent strong labor market data reinforce the hawkish narrative provided by the Fed," Christian Scherrmann, DWS Group U.S. economist, said in an email. "Looking ahead, Omicron looks set to dictate the fate of the economy in January and maybe in February. But current indications on how the new variant plays out suggest that the Fed will remain on track to reduce its accommodative monetary policy, most likely as early as in March this year, by hiking rates for the first time since December 2018."

'The run of big increases is over'

Despite the surge in inflation in December, many economists are looking for the rate of price increases to ease beginning mid-this year.

"December’s increase to 7.0% ... likely is not quite the peak which we think will be about 7.2% in January and February, but the run of big increases is over, and it will start to fall in March," Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note. "By September, we look for 4[.5]%."

Tendayi Kapfidze, U.S. Bank chief economist, told Yahoo Finance Live on Wednesday he expected "we might have one or two more months of really high prints before we start on the downtrend."

"Our expectation is that by the end of the year, we should be somewhere around the 3% level," he added. "So we should get a deceleration in inflation maybe starting in the second quarter and certainly in the second half of the year."

And while the headline CPI has yet to peak, others pointed out that some of the key components of CPI started to come down in December compared to prior months in the first hints at a broader moderation. This was particularly visible in the energy index, where prices fell 0.4% in December, compared to November. Fuel oil and gasoline prices each declined during the month, though they were still higher by upwards of 40%, compared to the same month in 2020. Food prices rose 0.5% in December, though this slowed compared to faster increases in each of the three months prior.

"Although today’s inflation number was pretty much in line with our and most analysts’ expectations, the data should have been better given the significant decline in energy prices, particularly gasoline," said Matthew Sherwood, global economist at Economist Intelligence Unit. "Core inflation is now rising faster than headline month on month. Inflationary pressures are now pretty well endemic across the entire U.S. economy."

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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter

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