The annual inflation rate rose for seven straight months in December as the economy gradually recovers from the COVID effect. Over the last 12 months, the inflation rate rose 1.4%, compared to 1.2% in the last two months. In the meantime, economists and policymakers typically pay close attention to core inflation, which is the overall inflation rate excluding Food and Energy. In December, core inflation rose to 1.6%, remaining well below the Federal Reserve's 2.0% core target.
However, inflation is expected to pick up later this year. While the U.S. ramps up COVID-19 vaccinations to get doses to more Americans, the economic reopening will likely put upward pressure on prices especially in industries that were held back during the pandemic such as airline fares, hotels, and apparel. Specifically, airfare was one of the expenditure categories that experienced the largest losses. In December, prices for airline tickets were still 18% lower than a year earlier.
To understand better how each industry can impact inflation, the chart below shows the relative size of the 8 major components of the CPI. The first three categories by relative size are: Housing (42.1%), Transportation (15.7%), and Food and Beverages (14.8%).
Nevertheless, the chair of the Federal Reserve recently pointed out that it will take some time for inflation to move up because of the existing significant disinflationary pressures around the world. NAR is forecasting inflation to rise by 1.8% in 2021. Although inflation is not expected to be a problem for years, remember that housing is considered a hedge against inflation, since home values and rents also increase when inflation is moving up. Moreover, once home buyers lock in their mortgage, they are able to pay off their mortgage with money that is worth less than it was when they borrowed it since inflation decreases the value of each dollar.