WASHINGTON, (Reuters) – The U.S. Consumer Price Index rose strongly in January. This was the largest annual inflation increase for 40 years. It could be fueling speculation in financial markets about a Federal Reserve interest rate rise of 50 basis points next month.

Labor Department reported on Thursday that the consumer price index increased 0.6% by December and climbed 0.6% in January. The CPI rose 7.5% in the twelve months to January. This is the largest year-on-year rise since February 1982.

This was following a December 7.0% increase and marks the fourth consecutive month of increases exceeding 6%. Reuters economists had predicted the CPI increasing 0.5% annually and accelerating 7.3% year-on.

The January report included a reweighting of the CPI based on data about consumer spending from 2019 to 2020.

High inflation is a problem in the economy due to a shift from goods and services spending during the COVID-19 epidemic. Pandemic relief spending of Trillions of Dollars boosted the economy, but it ran up against limitations in capacity as coronavirus left workers unable to make and deliver goods to consumers.

The rising inflation rate has reduced household purchasing power, and has made President Joe Biden less popular. Despite the fact that the economy is expanding at its fastest pace in 37-years in 2021, and the labor markets rapidly creating jobs.

To rein in inflation which has surpassed the 2% target of the U.S. central banks, it is likely that in March the Fed will begin raising rates. According to CME’s FedWatch, 25% of financial markets forecast a 50-basis point increase.

Partly, market predictions can be attributed to the fact that prices are increasing and several measures of inflation have been rising strongly over recent months.

However, economists believe that it’s unlikely the Fed will move as aggressively. The central bank is expected to increase rates by at least 25 basis points seven times this fiscal year, according to economists.

“The Fed does not want to create undue volatility in its first hike, which only makes further increases more difficult,” said Scott Ruesterholz, a Portfolio Manager at Insight Investment in New York. The Fed is more likely to direct to an accelerated pace for hikes at subsequent meetings in order to curb inflation.

STABLE UNDERLYING IFLATION 

The CPI rose 0.6% last month, after increasing 0.6% in December. The

In January and December, core CPI increased 6.0%. It was the highest year-on-year growth since August 1982. This followed a December 5.5% increase.

Core CPI is being driven by rising rents and shortages in goods such as motor vehicles. As the Omicron-related coronavirus infection subsides, monthly inflation may slow down in the months ahead.

According to government data, imports of goods rose at a record pace in December. This was due to ships loading their cargo following months of delay caused by labor shortages at ports. The December record for the highest number of wholesale motor vehicles was 10 years.

Inflation will still be high for some time, partly due to the delayed effect of rising wages. As they try to attract scarce workers, employers are increasing their compensation. End of December saw 10.9 million open jobs

“The Factors that drove inflation higher in 2021

These are unlikely to slow down and continue pushing inflation higher through the first quarter of 2022,” explained Kevin Cummins (NYSE :), chief U.S. economist, NatWest Markets Stamford.

“We anticipate that there will be an increase in services inflation such as wages, and highly-weighted rents, rather than goods inflation.

On Thursday, a separate Labor Department report showed that initial claims for state unemployment benefits dropped 16,000 to 223,000 in the seasonally adjusted week ending February 5. According to economists, the number of applications was expected at 230,000 for this week. As Omicron, a national raging disease, raged throughout the country at the start of January and the middle of February respectively, claims increased.

The record-breaking 6.149 Million reached in the early hours of April 2020 was broken.