Inflation Runs at Fastest Pace Since 1982 and Wages Rise

The Federal Reserve and the White House will have to contend with rising inflation and wage growth in the coming year as they try to keep the job market strong.

The Fed's preferred inflation gauge, the personal consumption expenditures index, came in at 5.8 percent in December, up from 5.7 percent the prior month. That was the fastest pace since 1982.

Inflation is not as high as it was a month ago, but it is still high at a time when pay is increasing. Wage growth is good news for workers, but it also increases the risk of high inflation because companies may raise prices to cover rising labor costs.

The Employment Cost Index, a measure of pay and benefits that the Fed watches closely, increased by 1 percent in the final quarter of the year. The gauge climbed 4 percent in the year through the fourth quarter, with its wages and salaries measure picking up by 4.5 percent, capping a robust year of increases.

Inflation is a political liability for the Biden administration and Democrats during the upcoming election year, as consumer confidence is being eroded by price gains. While the White House has taken steps to relieve pressure on supply chains, the job of slowing demand to bring prices under control rests with the Fed.

The Fed's policymakers have signaled that they will likely begin to raise interest rates at their March meeting as they try to prevent price increases from becoming a permanent feature of the economic landscape. Markets are nervously eyeing the Fed's next steps, trying to gauge how much it will raise rates and how quickly. Lower stock prices and slower economic growth could be caused by higher borrowing costs.

Inflation is expected to fade this year, though it is difficult to gauge when that will happen. The Federal Reserve Bank of New York produced a measure of the world's trade system that included delivery times and inventories.

As people buy more goods, inflation has increased. The world's factories and shipping lines have struggled to keep up with demand, resulting in rising prices for cars, lumber and clothing.

Rents have begun to increase recently, a sign that price gains are broadening and may last longer than expected. The rising costs of food and gas are making it difficult for households to make ends meet.

Consumer confidence has been affected by inflation uncertainty and another wave of virus, as people become less optimistic. The University of Michigan survey shows sentiment faltering as prices have risen, and the Conference Board's index went down in January.

The Conference Board's chief economist said that people are seeing an erosion of their purchasing power because of high inflation.

Fed officials and Wall Street economists alike expect price gains to fade this year, but it is not clear how much or how quickly they will do so. The Fed chair said this week that the situation has probably worsened since the December meeting, when the central bank forecast 2.6 percent inflation by the end of the year.

Mr. Powell said during a news conference on Wednesday that they are attentive to the risks of persistent real wage growth in excess of productivity.

The Employment Cost Index, which came in at a high during the third quarter, was cited by Mr. Powell as a reason why the Fed had decided to shift from stoking growth to fighting inflation.

The fact that the measure did not pick up as quickly as expected in the final quarter of the year could give investors some confidence that the central bank will not speed up its plans to withdraw economic help.