US Inflation Accelerates to 40-Year High

US inflation accelerated to a 7.5% annual rate in January, rising to a new four-decade high, the Labor Department said Thursday.

The January number includes a once-a-year revision that affects seasonally adjusted data for the past five years. The Labor Department also updated the list of goods included in the calculation, known as a spending basket, to reflect consumer habits in 2019 and 2020.

Prices for autos, household furniture and appliances, as well as for other long-lasting goods, continue to drive much of the inflationary surge, fueled by pandemic-related supply-and-demand imbalances. Most economists expect the dynamic to fade as businesses adapt and normalize demand. But it is not clear when supply snarls will ease enough to take pressure off prices, particularly because of recent disruptions from the Omicron variant of Covid-19.

Food inflation is also raising consumers’ grocery billspushed up by steady price increases for meat, eggs and citrus fruits. Energy-price gains had shown signs of easing after climbing steeply last year. But a recent sharp rise in crude oil prices threatens to keep gasoline prices elevated.

High inflation is the dark side of the unusually strong economy, posing a challenge to the Federal Reserve as it tries to quell rising prices without damping growth.

“This is not encouraging news for the Fed in its battle to get inflation heading back towards the 2% target,” said James Knightley, chief international economist at ING. “Rate hikes will do nothing to resolve supply chain strains and worker shortages, but they can contribute to taking some of the steam out of the economy and allow demand and supply to start moving towards a better balance, at the expense of weaker growth.”

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The economy expanded 5.5% last yearthe fastest pace since 1984. That brisk growth is powered by a strong labor market. Employers added 1.6 million jobs over the past three months, putting upward pressure on wages. With inflation well above the Fed’s target, the steady gains in hiring leave the Fed on track to raise interest rates next month and could prompt further increases in May and June.

Mounting wage pressures related to the nation’s tight job market could also start feeding into inflation. Annual wage growth was running at 4.5% in December, the fastest pace since 2002, according to the Federal Reserve Bank of Atlanta’s wage trackerwhich makes adjustments for changes in the composition of workers.

A steady pickup in rental costs, which account for nearly one-third of the CPI, is adding to inflationary pressure and will likely keep doing so, said Aichi Amemiya, senior US economist at Nomura Securities.

The rental vacancy rate dropped to 5.6% in the fourth quarter, its lowest level since the 1980s. Mr. Amemiya said such a low vacancy rate could push housing rents even higher as new lease contracts are signed this year, putting more pressure on inflation.

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Allison Reyes and her boyfriend, Patrick Oldt, had been in a new apartment located close to the Schuylkill River in Philadelphia’s Center City for four months when the basement flooded from high water after Hurricane Ida. That sent the couple looking for a new place to live — and gave them sticker shock because prices for similar rental properties were 30% more expensive than just a few months ago.

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“We were shocked. We were looking at the exact same apartments we had looked at just a few months earlier whose prices had gone from $ 2,400 a month to $ 3,000 a month, ”said Ms. Reyes, 34 years old, who works as a brand manager. “We ended up having downgrade in size and location. Now we’re spending more money for a smaller apartment by about 400 square feet. ”

In December, some 47% of small businesses said they planned to raise prices in the next three months, on the net, according to the National Federation of Independent Business, a trade association. That figure is down slightly from the last three months of 2021, but close to the highest share since monthly records began in 1986.

The Federal Reserve has signaled it plans to raise interest rates in 2022 in response to stubbornly high inflation. WSJ’s JJ McCorvey explains what higher rates could mean for your finances. Photo illustration: Todd Johnson

Alex Mishkit launched her salon, Alex Cher Beauty, a year ago. Since then, she has increased prices to keep up with the rising costs of key supplies. First it was the nitrile gloves, which leapt as much as 30%. Then the price of waxing sticks shot up, followed by the price of wax itself, which rose by around 15%.

“To a small-business owner going on her second year, it adds up. So I’m hyper-aware of the slightest increase because every dollar counts, “she said. With overall supply costs running between 10% and 15% more than they were when she opened her doors, Ms. Mishkit in December nervously announced a price increase of around 10%. To her surprise, she said, customers were supportive.

“I was definitely taken aback by the positive responses I received from clients,” she said, adding that it made sense given how consumers’ expectations have changed over the past year. “I mean, just turn on the news and it’s all about inflation. So I do not think there’s a shock when there’s a slight price increase. ”

Mr. Amemiya of Nomura Securities said that rising inflation expectations among consumers, along with wage increases across the labor force, add to the risk that price pressures remain persistent. That could encourage the Fed to raise rates more than expected even if the overall inflation trend declines in the coming months, he said.

Write to Gwynn Guilford at gwynn.guilford@wsj.com

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