The consumer price index came in slightly hotter than expected in December, as the CPI inflation rate hit a new 39-year high. The core inflation rate, excluding food and energy, rose to 5.5%, a new 30-year high. The Dow Jones industrial average rose following the CPI report in early Wednesday stock market action, as major indexes looked to continue their rebound that began Monday afternoon.
The CPI rose 0.5% from the prior month and 7.0% vs. a year ago, the biggest annual gain since June 1982, the Labor Department said. Wall Street economists expected a 0.4% monthly rise.
The core CPI, which strips out volatile food and energy categories, rose 0.6% from November, topping the 0.5% estimate .
Supply constraints and high demand, fueled by vaccines and and fiscal stimulus, have combined to stir up the biggest broad-based inflation rise in a generation. Industries that are struggling to keep up with demand and facing increases in their own input costs, including labor and transportation costs, are passing along price hikes.
Amid the fastest wage growth in decades, higher energy costs and rising rent, economists now expect the inflation rate to remain elevated well into 2022. Still, most economists expect inflation pressures to ease a bit as softer seasonal demand over the winter takes some pressure off of supply chains.
Yet there’s a risk that inflation pressures will become entrenched as household cost pressures push employees to demand higher wages, leading to more price increases.
Average hourly earnings are up a strong 4.7% from a year ago as the job market has tightened, Labor Department data shows. But real, or inflation-adjusted, wages are down more than two percentage points over the same period.
Dow Jones, Treasury Yields Reaction To CPI Report
The Dow Jones rose 0.4% after the CPI release. The S&P 500 added 0.65%, while the Nasdaq gained 0.9%. Investors may have been relieved the CPI inflation rate didn’t rise even more.
The Dow Jones, like the other major indexes, has come under pressure this year as higher Treasury yields have pinched stock valuations, with tech stocks bearing the brunt. Despite the surge in omicron cases, Wall Street seems to be looking ahead to robust economic growth as the virus wanes. Stocks have rallied after trying to put in at least a near-term floor on Monday morning.
As of Tuesday’s close, the Dow was off just 0.2% year-to-date. The S&P 500 has slipped 1.32% this year, while the Nasdaq composite is off 3.1%.
Be sure to read IBD’s The Big Picture column after each trading day to get the latest on the stock market trend and what it means for your trading decisions.
Shortly after the CPI report, the 10-year Treasury yield was off 2 basis points to 1.73%, after topping 1.8% earlier this week for the first time since January 2020.
Wall Street is now pricing slightly greater odds of four quarter-point Fed rate hikes than of three rate hikes this year, according to the CME Group’s FedWatch tool. Minutes from the Dec. 14-15 meeting released last week also signaled that policymakers are eager to begin shrinking the Fed’s bloated balance sheet soon after asset purchases end in March. That’s contributed to higher Treasury yields.
CPI Inflation Report Details
Prices for used cars and trucks rose 3.5% on the month and 37.3% from a year ago.
Demand for used cars has gotten a boost amid the global chip shortage that has snagged production for new autos. Prices for new vehicles rose 1% and are now up 11.8% from a year ago.
Prices for food away from home rose 0.6% in December, while the price of food consumed at home increased 0.4% last month.
Meanwhile, shelter prices rose 0.4% in December, as owner’s equivalent rent rose 0.4%.
Energy prices fell 0.4% on the month and increased 29.3% from a year ago.
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