U.S. consumer prices rose last month at the fastest annual pace in nearly 40 years, underscoring how rapid and persistent inflation is eroding paychecks and increasing pressure on the Federal Reserve to tighten monetary policy.

The consumer price index climbed 6.8 per cent from November 2020, according to Labor Department data released Friday. The widely followed inflation gauge rose 0.8 per cent from October, exceeding forecasts and extending a trend of sizable increases that began earlier this year.

The median forecasts in a Bloomberg survey of economists called for a 6.8 per cent annual gain and a 0.7 per cent advance in the monthly measure. U.S. stocks rose at the open after the inflation data were broadly in line with expectations compared with surprising to the upside in prior months. The yield on 10-year Treasuries slid and the dollar eased.

The increase in the CPI reflected broad advances in most categories, similar to last month’s report. Gasoline, shelter, food and vehicles were among the larger contributors to the month-over-month increase.

The data reinforce expectations the Fed will accelerate the wind down of its bond-buying program at the central bank’s final meeting of the year next week. Central banks -- and politicians -- around the world have come under mounting pressure to address rising inflation as workers spend more at the grocery store and the gas pump.

The figure “just keeps pressure on the Federal Reserve,” Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, said on Bloomberg Television. “This is a very difficult spot for them.”

Inflation “is going to stay hot and sticky through the first quarter,” she said.

A faster tapering would open the door for the Fed to begin raising interest rates. At the same time, investors pared bets on the steepness of Fed hikes in 2022, indicating Friday’s data showed stronger chances that inflation will slow given the monthly change was smaller than in October.

Annual CPI increases are anticipated to hover near 7 per cent into 2022.

What Bloomberg Economics Says...

“One could derive comfort from the thought that headline inflation has peaked, as recent indicators point to supply-chain bottlenecks turning the corner. Even so, we expect that inflation will remain elevated in the coming months -- hovering around the current level -- due to strong momentum in the stickier component of housing costs.”

-- Anna Wong and Andrew Husby, economists

Excluding the volatile food and energy components, so-called core prices rose 0.5 per cent from the prior month. The core CPI was up 4.9 per cent from a year earlier, a fresh 30-year high.

Shelter costs -- which are considered to be a more structural component of the CPI and make up about a third of the overall index -- rose 0.5 per cent in November from a month earlier. 

Compared with the same month last year, the 3.8 per cent gain was the biggest since 2007. Housing costs are anticipated to drift higher next year as surging rents and home prices feed into the measure.

Household furnishings, apparel and airfares also contributed to the increase in inflation.  

Rising prices for necessities are adding up for Americans: 

Food at home rose 6.4 per cent from a year ago, the most since December 2008
Gasoline climbed 6.1 per cent from the prior month, matching the October increase
Rent of primary residence and owners’ equivalent rent both increased 0.4 per cent from October

The data underscore how a perfect storm of snarled supply chains, a rebounding economy, robust consumer demand and labor constraints has driven up prices across the economy. While first concentrated in a handful of categories associated with the economy’s reopening, inflation has since broadened out to other categories.
 

POLICY FALLOUT

As a result, President Joe Biden’s approval ratings have sagged, increasing political pressure on the administration to act. While the White House has taken some steps -- like creating a supply-chain task force -- inflationary pressures continue to mount. Rapid inflation will also likely impact the ultimate size and fate of Biden’s Build Back Better bill.

Looking to next year, supply chain challenges will continue to drive up prices in the near term but are expected to fade as Americans shift toward more normal consumption patterns. Still, other factors, like labor constraints and housing costs, may keep inflation elevated.

Food prices will also probably stay elevated next year, according to David MacLennan, chief executive officer of Cargill Inc. The CPI report showed overall food costs, including away from home, rose 6.1 per cent from a year earlier -- the most since 2008.

“I thought inflation in ags and food was transitory. I feel less so now because of continued shortages in labor markets,” MacLennan said last month in an interview at the Bloomberg New Economy Forum in Singapore. “That’s one of the inputs to the supply chain that we’re watching most carefully.” 

Wages have risen substantially in recent months but not as fast as consumer prices. Inflation-adjusted average hourly earnings fell 1.9 per cent in November from a year earlier, the biggest drop in six months, separate data showed Friday.