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Economic Report: Has U.S. inflation peaked? Don’t bet on it

Inflation was already supposed to easing by now — if you had listened to all the experts last year. Now hardly anyone is going out on a limb to predict the due date for falling inflation.

The cost of living over the past year climbed a 40-year high of 7.5% in January, the government said Thursday. Just a year ago, inflation was rising at a meager 1.4% yearly pace.

Is this the peak for U.S. inflation? No one is sure.

“Price pressures remain intense,” noted chief economist Aneta Markowska of Jefferies.

She pointed out that inflation has spread from just a few goods and services six months ago to almost the entire economy. Rents showed the biggest jump in January in 21 years, for example, and the cost of furniture posted a record increase.

Read: High inflation has jacked up the cost of food, gas, cars and rent — and there’s little relief in sight

The huge surge in inflation wasn’t on anyone’s radar last year. As prices rose sharply in the spring and summer of 2021, Federal Reserve Chairman Jerome Powell and most economists insisted inflationary pressures would soon wane.

They blamed the “transitory” spike in prices on the reopening of the economy and what were seen as temporary pandemic-related disruptions in trade and the production of key supplies such as computer chips.

The Fed finally threw in the towel last fall and stopped referring to inflation as transitory. The supply-chain bottlenecks turned out to be a lot worse and more enduring than economists expected.

Adding fuel to the inflation fire, the cost of labor is also surging at the fastest rate in decades. Businesses were confronted last year with the worst labor shortage in decades as job openings rose to a record high, forcing them to pay more for wages and benefits.

Read: ‘If you’re a wage earner you’re going to fall behind’: Ex-Fed insider warns of ‘difficult few years’ due to inflation

The worry among some economists is that some inflation is going be ingrained in the economy unless the Fed acts aggressively to stamp it out.

“My main takeaway from the January CPI is that high inflation is taking root and shows few signs of receding any time soon,” said chief economist Stephen Stanley of Amherst Pierpont Securities.

Stanley was one of the few Wall Street
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pros to sound the alarm about high inflation early in 2021, well before the Fed caught on.

The Fed is expected to raise interest rates in March for the first time in four years to try to rein in prices and signal to investors it won’t let inflation get out of hand. Yet Wall Street is not entirely sure just how aggressive the central bank will act.

“The two big questions that arise out of the report are: ‘When will inflation ultimately peak;’ and ‘how aggressively will the Fed move to tame prices,’ ” said Jim Baird, chief investment advisor at Plante Moran Financial Advisors.

“Although price pressures are expected to ease as the year progresses, inflation will remain above the Fed’s 2% target for some time to come,” he said.

When will price pressures ease? Probably not in February.

Oil and gas prices are rising again, for one thing, and that’s likely to result in another big increase in the cost of living in the February when the consumer price index is released next month.

More likely the official rate of inflation will start to decline, if only slowly, between March and June — if just for technical reasons.

That’s because the monthly CPI inflation readings were very high last year during that four-month stretch. If those increases are replaced with smaller increases this year, therefore, the 12-month rate will decline.

“As those numbers fall out of the 12-month window, we may see some relief, though that does not seem so obvious anymore,” Stanley said.

Even if that’s the case, Americans won’t see much if any benefit this year. High inflation is already eating into their standard of living since prices are rising faster than wages.

At best, prices are expected to keep rising, just at a slower rate. The cost of few goods and services are likely to decline this year.

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