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US inflation rate hits near 40-year high

Prices in the US are rising at their fastest rate in almost 40 years, with inflation up 7% year-on-year in December.

Strong demand and scarce supply for key items such as cars are driving the increases, which are putting pressure on policymakers to act.

The US central bank is expected to raise interest rates this year.

The rise in borrowing costs is aimed at reducing demand by making purchases such as cars more expensive.

December’s increase marked the third month in a row that the US annual inflation rate has hovered above 6% – well north of policymakers’ 2% target. The last time the pace of inflation exceeded that level was 1982.

Wednesday’s report from the Labor Department showed signs that some of the pressures may be easing.

The cost of energy dropped 0.4% from November to December – its first decline since April. But over 12 months energy costs are up by nearly 30% and have returned to their upward trend in recent days.

“Overall, this is every bit as bad as we expected,” Paul Ashworth, chief economist at Capital Economics, said of the December inflation report.

Economists were initially hopeful that inflation would be transitory and ease as the pandemic faded. But ongoing production snarls and staff shortages as virus variants wreak havoc have made the price increases more persistent than expected.

“The supply-side constraints have been very persistent and very durable,” Federal Reserve Chair Jerome Powell told Congress on Tuesday. “We’re not seeing the kind of progress we thought we would see by now.”