US inflation climbs surprise 7.5% to hit 40-year high

WASHINGTON • US consumer prices surged last month by more than expected, sending the annual inflation rate to a fresh four-decade high and adding more urgency to the Federal Reserve's plans to start raising interest rates.

The consumer price index (CPI) climbed 7.5 per cent from a year earlier following a 7 per cent annual gain in December, according to Labour Department data released yesterday.

The widely followed inflation gauge rose 0.6 per cent in January from a month earlier, reflecting broad increases that included higher food, electricity and housing costs. Excluding the volatile food and energy components, so-called core prices increased 6 per cent from a year ago, also the most since 1982, and 0.6 per cent from a month earlier.

US Treasury yields surged, the dollar rose and stock futures slumped following the report. Economists had projected a 7.3 per cent year-on-year increase in the CPI and 0.4 per cent gain from a month earlier, according to Bloomberg survey medians.

The data reinforces the Fed's intentions to begin raising rates next month to combat broad-based inflationary pressures and could lead markets to expect even more aggressive action from the central bank.

The steady run-up in prices has eroded recent wage gains and reduced families' purchasing power, sucking much of the air out of what has been an exceptional bounce back in the US economy.

Leading up to the Fed's March 15-16 meeting, policymakers will also have the February CPI and employment reports in hand. Investors boosted their expectations for a half-point increase in the federal funds target rate next month, following the report.

While most economists expect a more gradual approach to lift-off - as has been telegraphed by some Fed officials - the acceleration of inflation on the heels of rapid wage gains will keep the possibility of a half-point hike on the table.

The rapid pick-up in inflation boils down in large part to the mismatch between supply and demand. With the help of massive government stimulus, a surge in household purchases strained factories and global supply chains.

Capacity constraints of United States producers trying to ramp up production were made worse by a smaller pool of available labour. The tight labour market, in which the unemployment rate is now 4 per cent, has led employers to bid up wages in an attempt to fill millions of job openings and retain workers.

Last year, compensation costs surged by the most in two decades. Even so, wages are not keeping up with inflation. Inflation-adjusted average hourly earnings fell 1.7 per cent in January from a year earlier, marking the 10th straight decline, separate data showed yesterday.

Shelter costs - considered a more structural component of the CPI and making up about a third of the overall index - climbed 0.3 per cent from the month ago. The rise reflected the biggest jump in rent of primary residence since May 2001.

Food prices rose 0.9 per cent in January, the most in three months, and energy costs advanced 0.9 per cent on gains in fuel oil and electricity. Food inflation is up 7 per cent from a year ago, the most since 1981.

The broad increase in the CPI also reflected higher prices for household furnishings, used vehicles, apparel and medical care. Prices of household furnishings and health insurance both rose by the most on record on a month-to-month basis.

BLOOMBERG