Prices climbed at the fastest pace in decades in the month leading up to the war in Ukraine, underlining the high stakes facing the United States — along with many developed economies — as the conflict promises to drive costs higher.
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The Consumer Price Index rose by 7.9% through February, the fastest pace of annual inflation in 40 years. Rising food and rent costs contributed to the big increase, the Bureau of Labor Statistics said, as did a nascent surge in gas prices that will become more pronounced in the March inflation report.
The February report caught only the start of the surge in gas prices that came in response to Russia’s invasion of Ukraine late last month. Economists expect inflation to pick up even more in March because prices at the pump have since jumped to record-breaking highs. The average price for a gallon of gas was $4.32 on Thursday, according to AAA.
Rapidly climbing costs are hitting consumers in the pocketbook, causing confidence to fall and stretching household budgets. Rising wages and savings amassed during the pandemic have helped many families continue spending despite rising prices, but the burden is falling most intensely on lower-income households, which devote a big chunk of their budgets to daily necessities that are now swiftly becoming more expensive.
The price burst presents a challenge for President Joe Biden, especially given that November’s midterm elections are fast approaching. Democrats will need to battle to retain control of Congress at a time when voters are feeling the squeeze of higher expenses. On Thursday, Biden acknowledged the pain consumers are feeling from rapid inflation but pointed a finger at President Vladimir Putin, blaming his invasion of Ukraine for fueling higher gas prices.
Democrats tweeted about the report Thursday using the hashtag #PutinPriceHike.
“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,” Biden said in a statement. “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 Americans can know this: The costs we are imposing on Putin and his cronies are far more devastating than the costs we are facing.”
The Ukraine invasion has compounded a stubborn inflation problem. Cost increases had been running fast for a year and accelerating for months, posing a problem for the Federal Reserve, which is in charge of achieving price stability. The central bank has signaled it will raise interest rates by a quarter percentage point at its meeting next week, probably the first in a series of moves meant to increase the cost of borrowing and spending money and slow down the economy. By reducing consumption and slowing the labor market, the Fed is able to take some pressure off inflation over time.
Broadening price pressures and high gas costs could become a serious issue for central bank policymakers if they help convince consumers that the run-up in prices will last. If people begin expecting inflation, they may change their behavior in ways that make it more permanent: accepting price increases more readily and asking for bigger raises to keep up.
“It was another bad report,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives. “Inflation was already way too high before the invasion of Ukraine.”
While the February report caught only a few days of post-invasion gas prices, the increase in fuel accounted for about one-third of the price index increase, the government said. Omair Sharif, founder of Inflation Insights, said he expects inflation to pick up to 8.3% in March as pump prices surge.
The gas shock is just the latest instance in which what can go wrong seems to be going wrong when it comes to prices.
Fast inflation began to kick in early last year, and many forecasters initially predicted that it would fade by the end of 2021 as the economy reopened from the pandemic and conditions returned to normal.
Instead, turmoil in supply chains collided with strong consumer demand for goods, and price gains accelerated. Now it is hard to guess how quickly and how much prices will moderate in 2022, as conflict abroad threatens to keep shipping routes tangled and parts scarce. Ukraine is an important producer of neon, which could keep computer chips in short supply, perpetuating the shortages that have plagued automakers. Higher energy costs could ricochet through other industries.
Even without further supply chain troubles, there are signs that inflation is widening beyond a few pandemic-affected sectors, an indication that they could last as the latest virus surge fades from view. Rent of primary residences, for instance, climbed by 0.6% from the prior month — the fastest monthly pace of growth since 1999.
Price gains have been rapid around much of the world, causing many central banks to scale back how much help they are providing to their economies.
The European Central Bank on Thursday decided to speed up its exit from its bond-buying program as it tries to counter rising inflation. Europe’s push to end its energy dependence on Russia promises to raise costs at a time when inflation is already nearly triple the central bank’s target.
In the United States, there are still reasons to think price gains will slow this year. Beginning in March, the data will be compared to relatively high readings from last year, which should mechanically start to bring down the year-over-year measure. But it is unclear when inflation will recede to the Fed’s 2% inflation goal. The central bank defines that target using a separate inflation index, but one that is also up considerably.
This article originally appeared in The New York Times.
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