Headline consumer price index (CPI) inflation in the U.S. will hit 6% within the next six months forcing the Federal Reserve Board to raise interest rates by at least 200 basis points, forecasts a new CIBC World Markets report.

The report notes that the U.S. economy has not seen an inflation rate this high since 1990 — and that only lasted four months. “You’ve got to go back to 1982, in the midst of the stagflation that followed the second OPEC oil shock, to see the last time American inflation was clocked at that kind of pace for any sustained period,” says Jeff Rubin, chief economist at CIBC World Markets.

Rubin notes that soaring energy prices are once again driving inflation concerns but that today high prices are emboldening the bargaining positions of many U.S. workers. “Soaring energy costs are rapidly turning global cost curves on their head.”

The result of these factors is the likely return of cost-of-living allowances (COLA) in North American wage negotiations, particularly in highly organized industries like steel. Rubin notes that high energy prices give U.S. manufacturing workers bargaining power that they have lacked for over a decade while at the same time encouraging them to ask for larger pay raises to keep pace with the soaring price of gasoline.

With labour building in inflation clauses, Rubin expects that interest rates will also have to rise. The report notes that when inflation rates touched 6% in 1990, the Fed funds rate was running around 7.5%, over three times what it is today. At the same time, a 10-year Treasury Bond was yielding 8.5%, over double what it yields today.

“We expect that the Federal Reserve Board will raise interest rates no less than 200 basis points by the end of next year,” adds Rubin.

The report finds that despite the recent decrease in global oil prices, supply pressures will continue to drive crude costs up which will translate into higher consumer prices at the pump, at the grocery store and at the electricity meter.