The peak of December's consumer prices may come soon, despite the likelihood of hot prices.

• The Labor Department releases the consumer price index on Wednesday, which is predicted to reveal a 7% increase in headline inflation, the fastest rate since 1982.
• The Federal Reserve is considering raising interest rates to combat inflation, and a significant increase in prices could be the justification for this policy change.
• Diane Swonk, chief economist at Grant Thornton, stated that it is still hot and important because the Fed is concerned about the 7% number being baked into wages and becoming more entrenched.

Inflation at the consumer level is predicted to have increased significantly in December, marking the highest spike in prices since the early 1980s.

In December, the consumer price increased by 0.4%, and 7% on a year-over-year basis, according to Dow Jones. This is higher than the 0.8% increase in November and the 6.8% gain year-over-year, the highest since 1982.

The Labor Department will release data on Wednesday at 8:30 a.m. ET, indicating that CPI is expected to have increased by 0.5% or 5.4% year-over-year, excluding food and energy.

Inflation is expected to peak in December or the first quarter of 2022, according to Luke Tilley, chief economist at Wilmington Trust. While prices are expected to increase more slowly in 2022 than in 2021, there will be no more stimulus, and weaker spending and supply chain issues will not be fully resolved. However, it is believed that we have passed the peak in some of the shipping supply chains.

Although economists differ on the precise moment when inflation will reach its peak, it is now clear that it has surpassed the initial time frame predicted by the Federal Reserve when it characterized inflation as "transitory" or temporary. In response, the Fed anticipates raising interest rates by three quarter-points this year to combat inflation.

Diane Swonk, chief economist at Grant Thornton, stated that the current temperature is still hot and it's crucial because it could lead to the 7% number being baked into wages and becoming more entrenched. She explained that the Fed is now in panic mode, which increases the risk of overshooting. This puts the Fed in a position of chasing instead of anticipating, which is concerning.

The Fed’s tools to mitigate rising prices

Jerome Powell, the Federal Reserve Chairman, stated on Tuesday that the central bank will employ its resources to control inflation if it detects prolonged price increases.

If inflation continues to remain high for an extended period, we may need to increase interest rates gradually, Powell stated. We will employ our available resources to bring inflation under control.

Inflation data has consistently exceeded expectations, and economists predict a higher rate of increase in the upcoming report.

Tilley stated that if the temperature exceeds expectations, it serves as confirmation of the course the Fed has already chosen. In addition to increasing interest rates, Powell announced on Tuesday that the central bank may begin reducing its balance sheet this year, which is another step toward stricter policy.

Watch for rising rents and ‘stickier’ increases

NatWest Markets' chief U.S. economist, Kevin Cummins, predicts that the peak in consumer headline inflation may occur this month, and he observes that the composition of inflation in 2021 is changing.

"This year, we're seeing a shift in our forecast from used cars and commodity prices to rents, which are stickier. Inflation is holding in around 3% due to rent and broader wage pressures building in the labor market," he said.

CPI is expected to increase by 3% by the end of the year, according to Cummins. He stated that rents have been rising over the past two years. Rent costs, hotel costs, and owners' equivalent rent make up the shelter component of the consumer price index, which accounts for approximately 30% of the headline CPI.

Cummins anticipates a 4.5% increase in rents in 2022, following a 3.4% rise in 2021. In 2020, the rate of rent growth slowed to 1.9% from 3.3% in 2019. He predicts that rents will rise even more in 2023.

Cummins stated that due to its significant weight, the CPI numbers will remain high.