US inflation surges to 7.5% in fastest annual rise for 40 years

Consumer prices are climbing rapidly in the US market. Photo / Getty Images

The US consumer price index rose 7.5 per cent last month compared with January last year, its fastest annual pace since 1982, heaping pressure on the Federal Reserve to act more aggressively to tame inflation.

Data released on Thursday by the Bureau of Labor Statistics showed CPI surpassing economists' expectations by surging above its previous 40-year high of 7 per cent on an annual basis recorded in December.

On a monthly basis, CPI rose by 0.6 per cent from the previous month, a steeper increase than predicted by economists, as Americans paid higher prices for a wide range of goods, including food, electricity and shelter.

US Treasury yields jumped after the report as traders bet on higher interest rates. Yields rise when bond prices fall. The persistence of high inflation has already prompted the Fed to speed up its timetable for tightening monetary policy, with the first interest rate increase since the onset of the pandemic expected to be approved next month.

Some economists said the Fed may have to take a more forceful approach to cool down the economy this year, with larger and more frequent interest rate increases rather than doing so gradually.

"The labour market is hot and inflation is even hotter, which places the Federal Reserve in an awkward position with an interest rate hike over a month away. As the inflation fire burns even hotter, the Federal Reserve will have to bring an even bigger fire hose to put it out," said Chris Rupkey, chief economist at FwdBonds LLC.

High inflation has challenged the Fed and also proved politically problematic for US president Joe Biden and members of the Democratic party heading into the midterm elections.

Biden said on Thursday the data was a reminder that "Americans' budgets are being stretched in ways that create real stress at the kitchen table", adding that his administration was using every tool at its disposal to try to curb inflation.

Following the data, shorter-dated notes, which track interest rate expectations, posted the biggest moves, with the yield on the two-year note reaching 1.51 per cent, its highest level since January 2020. The benchmark 10-year US Treasury yield breached 2 per cent for the first time since August 2019. The 30-year yield, which moves with inflation expectations, also rose to a multi-month high.

After the January CPI data was released, investors bet that the Fed would approve six quarter-point interest rate increases by December, as well as pricing in higher odds of a 0.5 percentage point increase in March.

US stock markets fell during trading, with the tech-heavy Nasdaq Composite down 0.37 per cent. Tech companies, particularly those with higher levels of debt, have been hurt by rising interest rate expectations this year as their future borrowing costs are set to increase.

The Fed has not committed to any particular pace for its tightening cycle, saying the tempo and scale of the rate increases would depend on the data.

"The task before us is to remove accommodation at the pace necessary to bring inflation under control. As this process continues, our monetary policy decisions will need to be data-driven and forward-looking," Loretta Mester, president of the Cleveland Fed, said on Wednesday.

Although the US recovery has benefited from strong job growth — including in January — and rising wages, these positive factors have been undermined by the increase in the cost of living and supply chain disruptions, exposing the Biden administration to a barrage of attacks from Republican lawmakers.

Biden on Thursday said there were "signs that we will make it through this challenge".

"While today's report is elevated, forecasters continue to project inflation easing substantially by the end of 2022," he added.

- Financial Times