U.S. inflation soared to a 40-year high last month as geopolitical tensions drove up energy prices and supply chain hurdles compounded price pressures driven by consumer demand. 

The Consumer Price Index rose 8.5% in March from a year earlier, overshooting the Dow Jones economists’ prediction that consumer prices would rise by an already high 8.4%.

Surging energy, housing and food costs continued to lift inflation, although core consumer prices, which exclude the turbulent food and energy categories, rose more slowly as car prices cooled for the second month straight, according to a report released by the Bureau of Labor Statistics. Still, core CPI rose 6.5% in March from a year earlier, which slammed Americans’ wallets even as wage increases driven by labor shortages seemed to put more money in some Americans’ pockets. Some economists believe the latest CPI report could signal that darker days are ahead for the U.S. economy as inflationary pressures broaden.

On a month-to-month basis, core inflation pulled back in March, rising 0.3% from February, — a fifth of a percentage point short of Wall Street’s predictions. The price growth deceleration was not uniform across core categories, however.  Price increases for clothing slowed modestly, while furniture prices trended upward. Meanwhile, used car prices, which had been elevated for several months, continued on a downward slide in March, falling 3.8%. Those prices are still up 35% from last year, however. 

Some economists believe the core CPI ebb suggests inflation may moderate throughout the latter half of 2022. 

But in the meantime, American consumers continue to feel the pain of inflation. And workers’ wages, which posted a 5.6% increase within the past year, aren’t substantial enough to cushion low-earning consumers from the rising cost of living, particularly as prices for essentials like food, energy and housing soar to new highs. 

Higher wages may also compel companies to raise their prices or to keep their employee roster lean. 

Christine Coven, a small business owner who runs a luxury consignment shop from her New York home, was tempted to hire help as orders picked up over the holidays. After luxury brands like Gucci and Chanel raised their prices by as much as 20% earlier this year, demand for second-hand luxury goods soared. Ms. Coven, who works a second job during the day and packs orders at night, said she feels overwhelmed by the rising demand. But she fears hiring employees in this tight labor market would be too expensive, and would force her to raise prices. 

“As a small business it’s just hard now to stay competitive and do it all by yourself, but help is expensive,” said Coven. 

She fears that raising prices to cushion the impact of increased shipping and labor costs would be too much of  a sticker shock for her customers, who are focused on getting the best bargain for the brands they love. 

Although employers are feeling the weight of rising wages, those wages still aren’t rising fast enough to help workers keep up with inflation. Over the past year, average hourly earnings for non-managerial workers fell 2.4% after adjusting for inflation, as higher consumer prices ate into household budgets, according to data published by the Labor Department. 

Price increases for essentials like housing, food and electricity have been hitting Americans’ pockets especially hard. 

Shelter costs, which comprise about one-third of the CPI, increased 0.5% from February — the highest monthly increase since May 1991 — while food prices increased by 1% during the same time period. 

Energy price increases painted a clearer picture of the economic impact of Russia’s late-February invasion of Ukraine than last month’s report did.  Energy prices overall increased 11% in March, and 39.5% from last year. But gasoline prices, in particular, hit Americans especially hard, as they jumped 18.3%.  

In addition to the war in Ukraine, supply chain shortages driven by the lingering effects of pandemic-induced labor shortages and shipping disruptions have continued to push prices up. 

“The post-Covid-19 pandemic recovery is being hit by a potentially huge global supply shock that will reduce growth and push up inflation,” said Brian Coulton, chief economist at Fitch Ratings Ltd. “The war in Ukraine and economic sanctions on Russia [also] have put global energy supplies at risk.” 

Recent economic headwinds have spurred the Federal Reserve to act quickly to cool the economy and quell inflationary pressures. 

The Fed approved a quarter percentage point rate hike last month to cool consumer prices. The rate hike was the first of six expected this year. The Fed is likely to enact the next hike when it convenes for a policy meeting on May 3 and 4. Many officials predict the fed-funds rate will rise to 1.875% by the end of this year, and rise further still in 2023.  

The central bank may struggle to curb inflation as the primary drivers of the past few months’ blistering CPI continue to broaden. 

“The issue for the Fed is that inflation pressures are broadening; excluding supply chains, energy and reopenings,” said Ryan Sweet, senior economist at Moody’s Analytics. “The Fed could be faced with a Hobson’s choice: Push the economy into a mild recession to tame inflation or wait and cause a more significant recession, as a stagflation scenario is possible next year if the Fed isn’t aggressive enough.”

Despite the economic hurdles ahead, markets reacted favorably to the CPI report. Stocks rose on Tuesday as the Dow Jones Industrial Average rallied in the hours following the report’s release.

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