Will US consumer price inflation hit another 40-year high?

Will US consumer price inflation hit another 40-year high?

The rise in US consumer prices is likely to have reached another four-decade high in December, capping a year of rampant inflation fuelled by supply chain logjams, labour shortages and strong spending.

Economists polled by FactSet anticipate a 0.5 per cent month-to-month increase in the consumer price index when the Bureau of Labor Statistics releases its report on Wednesday. That would leave CPI inflation up 7.1 per cent year on year, which would represent the biggest annual increase since February 1982. In November, consumer prices were up 6.8 per cent on an annual basis and 0.8 per cent against the previous month.

Price increases accelerated for much of 2021, prompting officials at the Federal Reserve to ponder earlier and faster interest rate increases as the central bank unwinds the economic support it implemented at the beginning of the coronavirus crisis.

Minutes from the Fed’s most recent policy meeting noted that supply chain disruptions and labour shortages are likely to last longer than officials initially predicted, adding to signs that elevated consumer prices may be here to stay even if inflation cools off in 2022.

“Inflation looks close to peaking, as the collision of large demand driven by federal stimulus fades and supply chain problems moderate,” said Brad McMillan, chief investment officer for the Commonwealth Financial Network. “With lower demand and greater supply, we should see price changes start to normalise in 2022.”

Analysts at the Wells Fargo Investment Institute recently forecast that annual CPI inflation will average 5.3 per cent this year alongside two interest rate increases by the Fed. Matthew Rocco

Did monthly UK GDP growth pick up before Omicron took hold?

The UK’s economic recovery is expected to have accelerated in November before the spread of the Omicron coronavirus variant hit the country, possibly reaching pre-pandemic levels for the first time since the onset of the crisis.

Bethany Beckett, economist at Capital Economics and Ellie Henderson, economist at Investec, both expect the country’s gross domestic product to have expanded by 0.5 per cent between October and November, when data is released on Friday, marking gathering momentum from near stagnation in October.

Supply-chain disruptions that held back manufacturing production in October “remained rife in November, easing only a tad”, said Henderson. However, she thinks “there should have been some rebound in mining and quarrying and utilities”, and construction output “may have recovered partially after its October fall”.

With people returning to workplaces and city centres, and with Christmas shopping taking place earlier, output in the services sector is also expected to have accelerated to 0.5 per cent growth in November.

If such projections are confirmed, the monthly measure of UK GDP could have returned to levels not seen since February 2020.

But momentum looks poised to slow temporarily for December, as the spread of Omicron discouraged or interrupted certain areas of economic activity even without legal restrictions in place. With surging Covid infections, output may have shrunk about 0.8 per cent in December, according to Beckett.

“Not only does demand appear to have been affected by mounting Omicron cases, but staff shortages are also disrupting production in certain areas,” said Henderson. Valentina Romei

What next for European gas prices after December’s wild ride?

Even in a year in which a rebounding global economy and constrained supply drove an unprecedented rally in global gas prices, December stood out.

In the week before Christmas, futures contracts linked to Europe’s wholesale gas price, already at a record high, soared to more than €180 per megawatt hour as weak confidence in Russian supply got even weaker.

Such was the strength of the rally that ships carrying liquefied natural gas originally destined for Asia changed course mid-voyage. In total, an estimated 7.3m tonnes of LNG was delivered to Europe in December, according to consultancy Rystad Energy.

The imports, aided by warmer than expected weather forecasts, worked. By January 4, European prices had stabilised at about €90 per megawatt hour, though still up about 350 per cent from the same time last year.

The volatility is unlikely to be over soon. Rystad predicts that weak gas flows from Russia into western Europe will continue while the confrontation over Ukraine persists, leading to “continued elevated prices”.

European storage levels, meanwhile, remain low, leaving the continent with little room to manoeuvre as it watches the weather forecasts for any signs of colder temperatures.

In Asia, the outlook is less concerning, with large LNG inventories in place in several countries and current forecasts for temperatures at or above normal in the coming weeks. Tom Wilson