Inflation hit historic highs last month as lingering supply chain issues and global tensions over Russia’s war with Ukraine dashed policymakers’ hopes that consumer prices would moderate.
The Consumer Price Index (CPI) climbed 7.9% in the 12 months through February — the fastest rise in year-over-year inflation since 1982. The increase surpassed CPI’s 7.5% jump in January, as prices rose 0.8% from January to February. Meanwhile, core CPI, which excludes the volatile energy and food categories, soared 6.4%, also a 40-year high.
Surging food and rent prices were the primary drivers of February’s red-hot CPI, as was an increase in the energy index, which rose 3.5% — the largest monthly energy price jump since October.
The report from the Bureau of Labor Statistics showed increases in consumer prices have continued to outpace robust wage gains. Gas prices, in particular, took a big bite out of consumers’ paychecks through February, especially following US policymakers’ decision to impose sanctions on Russia over the Ukraine crisis. The Federal Reserve has indicated it will raise interest rates to disincentivize consumer spending and rein in inflation. Still, economists doubt the central bank’s actions alone can curb inflation without hindering overall economic growth as the uncertainty of an emerging war in Eastern Europe continues to drive up embedded inflation.
Fuel prices skyrocketed 6.6%, accounting for about one-third of CPI’s increase. Gas prices first spiraled in the early part of February as the threat of US-imposed sanctions on the Russian energy sector cast a dark cloud over consumer optimism.
But prices hit new highs when Russian troops invaded Ukraine on Feb. 24. The average price for a gallon of gas was $4.32 on Thursday, according to AAA. Oil prices also hit 13-year highs, with prices topping $130 a barrel early this week.
The big jump in February’s CPI doesn’t fully account for the impact of the recent gas price hike, however. Russia’s late-February invasion sent fuel prices skyrocketing in early March, which means data for the invasion’s impact on consumer prices won’t be available until the March CPI report.
President Biden recognized the effect of the Ukraine crisis on American consumers Thursday.
“Today’s inflation report is a reminder that Americans’ budgets are being stretched by price increases and families are starting to feel the impacts of Putin’s price hike,” Mr. Biden said. “As I have said from the start, there will be costs at home as we impose crippling sanctions in response to Putin’s unprovoked war.”
But while economists warn that a rise in consumer prices — and, in particular, gas prices — will continue to accelerate over the next few months, robust wage gains may allow consumers to weather price increases.
American workers’ wages grew 5.7% in the year through January, outpacing many economists’ expectations. But prices are still rising more quickly than wages.
“It is going to get worse before it gets better.” said Ryan Sweet, senior director of economic research at Moody’s Analytics. “But growth in average hourly earnings, though not our preferred measure of wages, has been strong.”
Gas is eating up a smaller share of worker’s paychecks now than it was a few years ago.
The cost of gasoline is currently 11.7% of a private worker’s average hourly earnings — about three percentage points less than the 15% of average hourly earnings for which gasoline prices accounted between 2011 to 2014.
But rising wages could also feed into inflation as companies raise their prices to subsidize increased labor costs; and an upward spiral in prices might leave many lower-income Americans struggling to afford basic necessities like food and shelter.
The upward climb of food prices doubled from 0.5% in December to more than 1% in February, as lingering supply chain constraints limited the availability of some goods. And while supply chain bottlenecks have cleared considerably since December, prices for meat, poultry, fish and eggs still rose 1.2% in February, while cereals and bakery products rose 1.1%.
Housing costs, minus investments and upgrades, also climbed considerably, accounting for more than 40% of the core CPI.
Rent also rose 0.6% in February compared with the month before, up modestly from January. The price increases could raise concerns that spiraling inflation has become baked into the economy, particularly as new home costs are set to remain sky high as the pandemic transitions to an endemic.
This week, the Federal Reserve signaled it would address the problem by raising interest rates by a quarter percentage point at its meeting next week in an effort to reduce consumer demand and consumption and rein in inflation.
The central banks’ efforts to curb inflation may not be enough to erase the economic impact of the Ukraine crisis on the American economy, however.
“At this point forward, the numbers are going to be reflecting what’s happening in Ukraine. There’s not much the Federal Reserve can do to dampen those changes without hurting the overall economy, and it’s unlikely a rise [in interest rates] from zero to two percent is going to slow inflation much,” says Michael Englund, principal director and chief economist for action economics, LLC.