Annual inflation reaches 7.5 percent, highest rate since February 1982

Consumer prices rose 7.5 percent annually by the end of January, according to data released Thursday by the Labor Department, the fastest rate since February 1982.

The Labor Department’s consumer price index (CPI), which tracks inflation, rose on an annual basis for the sixth consecutive month and above the 7.2 percent increase projected by a consensus of economists.

Consumer prices also rose 0.6 percent in January, the same rate as in December, after falling for three consecutive months.

Without food and energy prices, the CPI rose 6 percent annually, the fastest rate since August 1982.

The U.S. has faced high inflation since mid-2021 as a surprisingly strong rebound from the coronavirus recession also kindled price increases. While the U.S. economy added more than 6 million jobs last year, grew 5.7 percent and saw consumer spending return to pre-pandemic levels, the rush of demand collided with severe supply and labor shortages, shipping bottlenecks and other pandemic-related constraints.

Price hikes for food, electricity and shelter contributed the most to January’s inflation jump, the Bureau of Labor Statistics said Thursday. Food prices rose 0.9 percent in January, nearly twice December’s gain of 0.5 percent, and energy prices also rose 0.9 percent as higher electricity rates offset declines in gasoline and natural gas prices.

Many economists, including top White House and Federal Reserve officials, expected inflation to cool off over the summer as the pandemic faded and more Americans returned to work. But the persistence of high inflation has posed significant political and policy challenges for both the administration and the central bank.

President Biden and Democratic lawmakers have struggled to sell the strength of the recovery to voters, who are increasingly dissatisfied with their handling of the economy, according to recent polls. The rising costs of food, fuel and other consumer staples has wiped out rapid wage gains for many workers — along with the political benefit.

Food prices are 7 percent higher, gas prices are 40 percent higher and energy prices in general are 27 percent higher than in January 2021, according to the Labor Department.

While inflation in 2021 had largely been limited to goods, particularly those wracked by supply chain issues, the January report also showed steadily rising prices for services, an alarming sign for many economists.

Prices for nonenergy related services rose 4.1 percent annually in January, with rent for shelter rising 4.4 percent, medical care prices rising 2.7 percent, transportation services rising 5.6 percent and recreation services rising 5 percent.

Grant Thornton chief economist Diane Swonk said the surge in inflation was “broad based and shows signs of becoming more entrenched in the service sector.” She warned the Fed was “way behind the curve and now needs to throw ice into a boiling pot.”

The Fed already laid the groundwork in January to increase interest rates several times this year as inflation rises well above their annual average target of 2 percent. The bank all but formally confirmed it would raise interest rates in March from the current baseline, which was set near zero as the pandemic wracked the global economy in 2020.

While the Fed typically hikes or cuts interest rates 0.25 percentage points at a time, some economists expect the Fed to consider a steeper 0.5 percentage point increase next month.

“The Fed sees its top priority as taming inflation. These strong price data raise the prospect of the Fed starting its tightening cycle with a 50 [basis point] rate hike at its March policy meeting, followed by consecutive rate hikes at the subsequent meetings,” wrote Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, in a Thursday analysis.

One basis point is one one-hundredth of a percentage point.

“If the Fed decides that 50 [basis points] is too strong to kick off the tightening cycle, 50 could be in the cards for the following meetings,” she continued.

Most Republican lawmakers and an array of economists had urged the Fed to begin hiking interest rates last year, though Fed officials resisted over concerns it would limit the return of workers to the labor force. The Fed, however, pivoted sharply in December as inflation continued to spike and pose potential threats to future job gains.

The January inflation figures will keep the Fed firmly on its path to hike interest rates, though higher borrowing costs may have little impact on the shipping bottlenecks, COVID-19 containment measures in other countries and labor shortages driving prices higher.

Biden is also sure to face rising pressure to quell inflation, though the president also has limited control over ways the persistent pandemic and an uneven economic recovery are fueling price increases.

“The truth is the President can do very little to lower inflation. He can & should do everything he can on supply (and he is doing most of it already) but won’t add up to much,” tweeted Jason Furman, the chairman of the White House Council of Economic Advisers under former President Obama.

“Congress *could* lower inflation with contractionary fiscal policy but I would leave it to the Fed,” Furman continued, adding that Biden’s proposed $1.9 trillion social services and climate bill, known as the Build Back Better Act, could help cool off rising prices. 

Biden, Democratic lawmakers and left-leaning economists have argued Build Back Better would reduce prices for health care, prescription drugs and child care over the long-term. Supporters of the bill say it would do so without fueling more inflation thanks to tax increases included to cover the cost.

But that argument has fallen flat with Sen. Joe Manchin (D-W.Va.), who announced his opposition to the Build Back Better plan in December and warned Thursday against additional spending.

“It’s beyond time for the Federal Reserve to tackle this issue head on, and Congress and the Administration must proceed with caution before adding more fuel to an economy already on fire,” Manchin said in a Thursday statement.

Updated at 10:45 a.m.