Data released on Friday ahead of next week FOMC meeting showed US CPI reached the highest annual rate since 1982 at 6.8%. Analysts at Wells Fargo, pressures remain broad based, with supply chains still struggling to meet turbocharged demand for goods, and services inflation only recently beginning to reflect the pandemic’s effects on housing costs. They expect the monthly trend in price gains to moderate ahead, but consider there is a lot of daylight between the current pace of inflation and the Fed’s goal.

Key Quotes: 

“Once again strength was broad based. The goods side of the economy continues to adapt to the massive shift in spending on “things”, and services inflation pushed forward as travel-related prices rebounded and housing inflation climbed. While current strength continues to reflect the strains of the pandemic, that is likely to be little comfort to consumers seeing paychecks and savings stretch less.”

“We expect headline CPI to peak on a year-ago basis at about 7% in the first quarter before base effects get tougher come spring. Monthly gains should continue to trend lower as the acute pressures from goods inflation begins to ease up and offsets the emerging momentum in services inflation. However, another big wave of COVID cases this winter could delay relief by keeping goods demand turbo-charged and global supply lines strained.”

“Even as the monthly trend in price hikes moderates ahead, there is a lot of daylight between November’s increase and the 0.2% monthly gains that would return inflation to a pace consistent with the Fed’s target. We estimate that headline and core CPI will still be above 3% year-over-year this time next year. We therefore look for the Fed to announce accelerating its wind-down of asset purchases at its meeting next week and to then raise the fed funds rate 50 bps in the second half of 2022. Slower inflation next year is not the same as benign inflation, and we think the Fed will need to respond accordingly.”

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