As bad as expected

US all-items CPI rose 7.0 percent year-on-year in December, up from the 6.8 percent gain posted in November. The increase was in line with market expectations and marked the highest rate of increase in consumer prices since June 1982.  Stripping out volatile food and energy prices, the December figure was better but by no means good: that measure rose 5.5 percent in the year, up from 4.9 percent in November, its biggest annual rise since February 1991.  

If there is any good news at all in this report, it lies in the fact that the monthly rise in the all-items index, at 0.5 percent, was well below the outsize gains seen in Both October and November.  However, this will provide no comfort to policymakers at the Fed.  The decline in the all-items figure largely resulted from a monthly decline in the energy component, with both gasoline and natural gas prices easing in the month. There are already clear signs of energy prices, notably for natural gas, heading higher in January.

The calculation of the year-on-year index will also work against any early easing of perceived inflation pressures. All-items CPI rose only 0.3 percent and 0.4 percent in January and February 2021 respectively. If the monthly gains in the first two months of this year match December's 0.5 percent -- and the actual outcome may well be higher -- the year-on-year rise in headline CPI will reach 7.5 percent as last year's lower readings fall out of the calculation. It is only in Q2 that this "base effect" could start to edge the annual figure lower. 

The Fed cannot wait around for that to happen.  No doubt Chair Jerome Powell had advance knowledge of the December CPI data when he appeared before Congress yesterday. Market expectations have been focused on a possible rate hike at the March 15-16 FOMC meeting, when the Fed is set to release its updated economic forecasts. However, there is a much earlier FOMC meeting than that: January 25-26. Given today's data, the tone of Powell's testimony and the increasingly urgent need to curb inflation expectations, the start of the tightening cycle may be just a couple of weeks away.