US Inflation Hits 8.5% After Soaring Food and Energy Prices

U.S. consumer price growth surpassed 8% in March, growing at its fastest pace since 1981 after food and energy prices soared due to Russia’s war with Ukraine.

Consumer prices last month rose 8.5% from a year ago, slightly above Wall Street expectations, the Bureau of Labor Statistics said on Tuesday.

Monthly growth registered at 1.2%, the fastest increase since September 2005 and fast compared to the 0.8% increase recorded in February.

However, once volatile items such as food and energy were removed, the “core” CPI rose 0.3% in March. That was the slowest increase since September, but still translated into a 6.5% year-on-year gain.

The correction from the previous monthly pace of 0.5% prompted a rally in the Treasury and funding markets overnight, as traders bet that the Federal Reserve will not policy tightening as the markets had predicted to quell inflation.

However, markets are still pricing in a hike in the Fed’s benchmark policy rate to 2.45%. Although down from 2.59% earlier in the day, it is still a lot above the current range of 0.25 to 0.50%.

Annual Percentage Change in CPI

“Everybody is worried about inflation,” said Vincent Reinhart, a former senior Fed employee and now chief economist at Mellon. “It is number one in the polls. It’s eating up the Fed’s bandwidth right now. Until what the world is saying changes materially, the Fed will focus on inflation.”

The data included the economic impact of Russia’s invasion of Ukraine for the first time, which clouded the global outlook and raised concerns about slowing growth coupled with mounting price pressures. Russia is one of the world’s largest energy exporters, and both Russia and Ukraine main supplier of wheat and other cereals.

The Biden administration on Monday blamed the war on rising prices, while White House Press Secretary Jen Psaki said the CPI would “raise abnormally due to Putin’s rise in prices”.

The figures underscored the impact of volatile commodity prices, with the spike in gasoline accounting for more than half of the overall March CPI gain. Over the past year, prices at the pump have increased 48%, including an 18.3% increase in the March-February period.

In addition to energy prices, core services prices also increased in March, up 0.6 percent month-on-month or 4.7 percent year-on-year. That was the biggest monthly gain since August 1992.

Accommodation-related costs increased by 0.5% month-on-month as the biggest contributor to the increase in core prices and increased by 5% year-on-year. Rents rose 0.4%, while hotel fees rose 3.7% between February and March. Airfares have increased 10.7% on the month, or 23.6% over the past year.

But there are already signs that prices are slowing elsewhere. Used car prices, which have skyrocketed since the pandemic pushed many Americans away from public transportation, fell 3.8% in March. The cost to buy a new car rose 0.2 percent from a month ago, a smaller increase than the increase registered in February.

Fears that inflation will become more ingrained in the world’s largest economy have prompted the US central bank in recent weeks to take a more aggressive approach to tightening monetary policy.

The Fed is now ready to raise interest rates cut half a percentage point at its next policy meeting in May, twice the pace of March rate hikes, as it seeks to lift its benchmark policy rate to a more “neutral” level that does not support or limit growth at the end of the year .

Officials forecast that rate to be around 2.4%, meaning at least one half-point adjustment plus four quarter-point rate increases by 2022.

Central banks are also set to start shrink the balance sheet by $9 billion next month, up to $95 billion a month for about three months starting in May.

US financial markets rallied after the release of the data, with the benchmark S&P 500 index up 0.6% and the tech-heavy Nasdaq Composite up nearly 1%. U.S. Treasuries also rallied, with 10-year yields falling 0.08 percentage points to 2.7%. Yields decrease as bond prices rise.

“Part of what we are seeing. . . Ashish Shah, chief investment officer for public investments at Goldman Sachs Asset Management, said it was recognition that the economy was still healthy and would need more than a moderate shock in oil prices and moderate growth. to deflect economic growth”.

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