It’s been a long time, but the U.S. economy may finally be nearing a turning point.
Data released by the Bureau of Labor Statistics on Wednesday showed a broad measure of inflation rising at a pace not seen in two years, evidence that the sustained growth of the past few years may have absorbed slack in the economy.
The consumer price index -- a broad measure of inflation that samples the price of goods and services including hot dogs, housing, haircuts, prescription drugs and college tuition -- rose 0.3 percent in December, in line with economists’ expectations and the November reading. In 2016, the index rose 2.1 percent, the fastest 12-month jump since mid-2014 and the largest increase in a calendar year since 2011.
If it stays steady or increases in coming months, such an inflation reading could strengthen the argument for the U.S. Federal Reserve to hike interest rates later this year.
“We want to be in a warming trend -- it’s been chilly for a long time,” said Diane Swonk, a Chicago-based economist. “The Fed wanted this, but they don’t want it too fast. There is a narrow band between what is a sign of a stronger economy and overheating.”
The U.S. labor market has steadily expanded in recent years, adding 183,000 jobs a month on average in 2016. But worker wages and the price of goods have still remained stubbornly low, a missing link in the country’s economic recovery. The low price of oil and the strength of the U.S. dollar, which makes imported products relatively cheap, have both helped to keep prices down.
That has shown signs of changing in recent months. In December, wages rose 2.9 percent from the year earlier, the strongest increase in more than seven years. Now, businesses appear to be on the verge of passing the costs of the higher wages they are beginning to pay on to their customers in the form of higher prices.
Rising prices for motor vehicle insurance, medical care, education, airline fares and automobiles helped to push up consumer prices in December. But the increase was mainly driven by the rising the price of gasoline. After bottoming out in early 2016, the price of Brent Crude has risen more than 90 percent in the last year and topped $50 a barrel in recent months.
Housing costs are also driving up consumer prices. “There’s still shortfall in affordable housing and affordable rents. It is the kind of inflation that people feel fast and get angry about quicker,” said Swonk.
Economists and the Fed are waiting to see what effect the incoming administration’s policies will have on price increases. President-elect Donald Trump has proposed slashing taxes and boosting infrastructure spending, measures which could cause inflation to rise by more than expected and prompt the Fed to raise rates again this year.
“We're operating under a cloud of uncertainty at the moment, and we have to wait and see what changes occur and factor those into our decision-making as we gain more clarity,” Fed Chair Janet Yellen said at a news conference in December.
Elsewhere in the world, the threat of deflation appears to be receding. In December, rising food prices pushed inflation in the UK to its highest level in two years, and consumer prices rose in almost all countries of the Eurozone.