Key inflation gauge surges 5.8% in December, fastest pace in four decades

A key measure of annual inflation that is closely watched by the Federal Reserve is running at the hottest pace in nearly four decades as widespread supply disruptions, extraordinarily high consumer demand and worker shortages fuel rapidly rising prices.

Prices soared by 5.8% in the year through December, according to the personal consumption expenditures price index data released Friday morning, beating out the previous month's increase of 5.7% to become the fastest inflation pace since 1982. 

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In the one-month period between November and December, prices jumped 0.4% (0.5% when excluding food and energy costs). 

Excluding the more-volatile measurements of food and energy, prices rose 4.9% in December from the previous year – the highest since September 1983. That measurement is the Fed's preferred gauge to track inflation; it marks the ninth consecutive month the measure has been above the central bank's target range of 2%. 

The inflation spike largely reflected surging energy costs, which rose 29.9% from a year ago, and food costs, which were up 5.7% over that same time period. Services inflation rose by 4.2% in December, and goods inflation increased 8.8% – up from the 8.5% pace a month prior, the data shows.

The PCE report was accompanied by data on household spending, which showed that consumer spending fell 0.6% last month, with purchases of cars, electronics and clothes declining. Higher prices may have deterred some households from shopping, along with a surge of the highly contagious omicron variant, which has elicited some fresh business restrictions.

Labor costs are also rising: A separate report on Friday showed that the employment cost index, a lesser-known gauge that measures wages and benefits paid by employers, jumped 1% in the final quarter of 2021 from the previous year, bringing the total gain for the year to 4%. While there are several factors contributing to high inflation, experts have warned that labor costs are a major contributor to rising prices.

"We are attentive to the risks that persistent real wage growth in excess of productivity could put upward pressure on inflation," Fed Chairman Jerome Powell told reporters on Wednesday, suggesting the employment cost index had played a key role in the central bank's decision to begin tightening policy.

The data is further evidence of a spike in prices illustrated by a separate measure – the Consumer Price Index – which showed inflation rose by 7% in December from the previous year. 

Raging inflation has inflicted financial pain on millions of U.S. households, particularly low-income families, eroding wage gains and setting up a massive political challenge for President Biden, who has seen his approval rating sink in conjunction with the rising prices. It has also forced the Federal Reserve to concede that surging prices are not transitory and to take steps to dramatically normalize policy.

The reports will likely reinforce the Fed's decision this week that a March rate hike is appropriate as central bank policymakers seek to keep prices under control and combat the hottest inflation in nearly four decades.

Although central bank officials have left rates unchanged since March 2020, they indicated broad support this week during their policy-setting meeting to begin aggressively normalizing policy, including raising rates amid growing concern over the rapid increase in consumer prices.

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A rate increase would mark the first since December 2018. 

"Inflation has persisted longer than we thought, and of course, we're prepared to use our tools to ensure that higher inflation does not become entrenched," Chairman Jerome Powell told reporters on Wednesday.