Inflation hits 39-year high — here's what that means for interest rates

Fed makes monetary policy shift in December meeting

Inflation surged in November, rising at its fastest rate in 39 years. Here's what that means for interest rates.  (iStock)

U.S. inflation continues to soar amid economic improvement, rising at its fastest pace in 39 years, according to the latest report from the U.S. Bureau of Labor Statistics (BLS). 

The Consumer Price Index (CPI), which is a measure of inflation, rose 6.8% annually in November, the highest 12-month increase since June 1982. It was up 0.8% on a seasonally adjusted basis from October, the CPI for All Urban Consumers (CPI-U) showed. 

"Inflation continued to surge in November," Dawit Kebede, Credit Union National Association (CUNA) senior economist, said. "Supply chain disruptions, higher demand for goods that continue to exceed pre-pandemic levels and increases in COVID-sensitive items such as shelter contributed to the rise."

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Federal Reserve responds with shift in monetary policy

After the inflation numbers were released, the Federal Open Markets Committee (FOMC) held its December meeting and made several major shifts to its monetary policy. The Federal Reserve changed its interest rate projection for next year, now forecasting three rate hikes instead of the previously expected one or two. It also forecasts three more rate hikes in 2023 and two in 2024, leaving the federal funds rate at 2.1% by the end of 2024.

The Fed also announced its plan to increase its tapering of Treasury and mortgage bond purchases, dropping by $30 billion per month. This is up from its previous tapering of $15 billion per month, which it announced in November. This would completely phase out the Fed’s bond-buying by March 2022, as the growth rate for inflation expectations rise.

"We are prepared to use our tools to make sure high inflation doesn't get entrenched," Federal Reserve Chair Jerome Powell said in a news conference following the FOMC meeting. "This is a strong economy, one in which it's appropriate for interest rate hikes."

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Fed to stabilize prices amid COVID-19 disruptions

Many sectors saw price increases in the latest BLS report, including gasoline, shelter, food, used cars and trucks and new vehicles, all of which saw the largest increases in November. For example, gas prices surged 58% since last year, while beef prices increased 20.9%. Household furnishings and operations, apparel and airline fares also saw prices rise.

The White House previously said that Americans’ rising hourly wages are outpacing inflation levels. However, based on BLS' data, this is not the case even when excluding food and gas, which brings core inflation to 4.9%. This is still slightly higher than the current 4.8% growth in wages, according to the November employment report.

Energy prices surged 33.3% from last year, while the food index increased by a 6.1% annual rate of inflation, each representing the largest increase in those sectors in at least 13 years, according to the BLS. And as prices continue to surge, the Central Bank is more focused on bringing inflation under control. 

"The Federal Reserve was focused on supporting maximum employment as the recent price spike was thought to be transitory due to supply chain issues," Kebede said. "Now the Fed seems to be concerned with stabilizing prices since COVID-related disruptions may not ease up soon."

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