In December, inflation rose again, hitting a high last seen 40 years ago. The 12-month increase in CPI-U was 7.0%. The month-over-month increase was 0.5%, down from 0.8% the previous month.
Energy and food were some of the largest contributors to increasing inflation. Demand for natural gas and gasoline decreased, which is why energy inflation slowed for December. Used autos (3.5% increase) and shelter (0.4% increase) remain at the top of the list.
Lack of supply in the auto industry, due to chip shortages, along with lack of housing supply, will likely continue to overshoot the FED's inflation targets, even as other areas decrease. As house prices rise, so too will rents but at a lagging pace. Supply chain disruptions have eased but are still a contributing factor to inflation.
“A prolonged surge of the Omicron variant may continue to push prices higher by worsening labor shortages and supply disruptions, which showed signs of improvement in December,” CUNA Senior Economist Dawit Kebede said to cutimes.com. “Recent price increases in housing contribute the most to overall inflation given their larger weight in household spending. This may show a shift from goods to services as the main driver of inflation moving forward.”
The FED will end asset tapering in March. Until then, its balance sheet will continue to grow. Two FED meetings are coming up — one at the end of January and another in March. It's possible the FED could announce the end of tapering at the next meeting. This would allow it to begin hiking rates in March without having to taper simultaneously. FED Fund futures put the probability of a March rate hike at 78%.
It's widely expected that the FED will hike three times in 2022. There's also a higher chance they'll hike four times vs. two.