US inflation gauges expected to show sustained rising pressure

Two closely watched measures of US inflationary pressures are expected to show sizeable gains, which would provide additional cover for the Federal Reserve to act forcefully to temper demand in the world’s largest economy.

The US central bank’s preferred inflation gauge — the core personal consumption expenditures (PCE) price index — is set to have increased another 4.8 per cent in December from the year before and 0.5 per cent from the previous month.

That would represent a small acceleration from the 4.7 per cent annual pace reported in November and the fastest rate since September 1983. Once volatile items such as food and energy are factored in, the PCE index is expected to have jumped 5.8 per cent.

The most recent data on consumer prices will be released alongside the latest employment cost index (ECI) report, which tracks US wages, salaries and benefits. Total pay for civilian workers for the fourth quarter is expected to have risen in line with the record-setting 1.3 per cent increase seen between July and the end of September.

Both reports are due out at 8:30am Eastern Time on Friday.

Jay Powell, the Fed chair, cited the previous ECI release, which showed a 3.7 per cent jump in total pay for the 12-month period ending September, as a primary reason why the central bank decided in December to speed up the scaling-back of its stimulus programme.

Rather than continuing to buy government bonds to the end of June, the Fed is now planning to cease purchases of Treasuries and agency mortgage-backed securities in early March, right around the time it is expected to begin raising interest rates for the first time since 2018.

The data will reinforce the central bank’s decision to keep its options open to either raise interest rates at the seven remaining policy meetings this year or consider supersized adjustments that bump up the federal funds rate by half a percentage point, as opposed to the typical quarter-point increase.

Powell refused on Wednesday to rule out either option at a press conference following the first two-day gathering of the Federal Open Market Committee this year.

Market expectations for the policy path forward have since shifted, with traders now pricing in at least three more interest rate increases in 2022 after “lift-off” from the current near-zero levels in March.

Soaring inflation and strong economic growth have forced the Fed to assume a much more hawkish stance than initially expected just a couple of months ago. The labour market has also made significant strides and now appears historically tight owing to an acute worker shortage.

The Fed chair on Wednesday reiterated that the central bank is “attentive” to the risks caused by “persistent” wage growth, which he warned could lead to even higher inflation.

“We have an expectation about the way the economy is going to be evolved, but we’ve got to be in a position to address different outcomes, including the one where inflation remains higher,” he later said.

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