US inflation expected to hit a new high in February

by Gabriel T. Rubin | UPDATED March 10, 2022 05:30 AM EST

Rising energy costs related to Russian invasion of Ukraine are driving prices even higher, economists say

US inflation is forecast to climb to another four-decade high in February, with skyrocketing energy costs and commodity prices expected to rise further related to the Russian invasion of Ukraine.

Economists polled by the Wall Street Journal expect the Labor Department to report Thursday that the consumer-price index hit a 7.8% annual rate in February. The index of goods and services in the entire economy is measured throughout the month. Rising energy prices in late February would be included in inflation readings, but the rise did not in March that kept crude oil prices at their highest level since 2008 and US gasoline prices at record highs.

Excluding volatile energy and food prices, economists expect consumer inflation to rise at a 6.4% annual rate in February, up from 6% the previous month. The CPI measures how much consumers pay for goods and services, including groceries, clothing, restaurant food, entertainment and vehicles.

Before the Ukraine crisis, economists and policymakers were expecting a peak in year-on-year inflation this spring as supply chains recover from pandemic-related disruptions and the Federal Reserve expected a series of interest rate hikes next week. starts. But the outbreak of war has pushed up the prices of oil, wheat and precious metals excessively, threatening prolonged high inflation.

Joel Naroff, chief economist at Naroff Economics LLC, said, “We thought inflation would ease, especially because of the entanglement of the global supply chain, but we don’t know how it will regress to what is happening in Ukraine.” “

The increased inflation in Ukraine before the war was primarily driven by strong demand for goods, shipping bottlenecks, and supply constraints such as semiconductors. Fed officials were prepared to race higher inflation for the start of the year, but recent trends have been higher than expected. Housing and food costs have risen sharply, and signs of softening prices in the used car market have been hit by further disruptions in new automotive manufacturing.

The economic disruption and global backlash from Russia’s invasion of Ukraine could further exacerbate inflation, as Russia is a top global supplier of oil and natural gas. One rule of thumb, which Fed Chairman Jerome Powell referred to last week, holds that a $10 per barrel increase in oil prices pushes up overall US inflation by 0.2 percent. Brent crude, the global oil benchmark, has gained nearly $40 a barrel since the beginning of the year. Russia is a major player in global markets for metals used in the production of cars and airplanes, and for components in fertilizer, a major spender in food production.

Because of Russia’s role in global energy and other commodity markets, “we are going to see upward pressure on inflation, at least for some time,” Mr. Powell told the Senate Banking Committee last week.

Mr Powell has said he expects the central bank to raise rates by a quarter percentage point at its March 15-16 meeting and additional hikes will follow later in the year. The plan was drawn up before the invasion of Ukraine.

“I think it is appropriate to proceed with our minds before Ukraine is invaded,” Mr. Powell said. “At this very sensitive time, it’s important for us to be careful. The way we conduct policy is simply because things are very uncertain and we don’t want to add to that uncertainty.”

On Sunday, the nation’s average gasoline price surpassed $4 a gallon for the first time since 2008, according to AAA, which tracks daily retail prices. By Wednesday, prices had reached their all-time high, not adjusted for inflation.

The surge in energy and commodity prices is the latest challenge for businesses, which have had to test whether their customers are willing to pay higher prices for products and services.

John Merritt, vice president of Elaine Bell Catering in Napa, Calif., is pleased to see his business recover after two years of difficult times in which in-person programs dried up and planning for the future seemed impossible. But rising labor costs and a lack of stability in food and gas prices have hurt business.

“We have been able to pass on some of the cost to customers, but many were contracted to lower prices,” and rising costs have eaten away at their profit margins, Mr. Merritt said.

To hedge against future price increases, Elaine Bell Kettering has begun incorporating an inflation plunger into new contracts. “We are giving them the best price they can if they do their event today,” Mr. Merritt said. “But where we’re usually booking things for 18 months, we have to price it more like a long-term labor contract. That has CPI adjustments.”

Some economists believe that inflation is still likely to peak soon, perhaps as early as this month. But war in Ukraine raises the possibility that the peak will be higher, and it will take longer to descend to the lower levels, he says.

“The momentum on the supply-chain front is hampered by war,” said Cathy Bostjanic, chief economist at Oxford Economics. It has now raised its expectations for annual inflation at the end of 2022 to closer to 4% instead of 3%.

A primary concern for policymakers going forward is that higher wages will keep inflation under pressure, causing companies to raise prices to match the cost of labor. Still, the private sector’s average hourly earnings grew by a seasonally adjusted 5.1% in February over the previous year, well below the rate of inflation.

Nitin Kumar, a Herndon, Va., resident who worked at a fintech company, was grateful to have had “substantial growth” in early 2022, but after looking at the rate of inflation, he questioned how far his money really goes. . He’s considering whether he should shop at discount grocery stores or take other cost-saving measures.

“I need to start considering things I can do myself – like walking more instead of driving,” Mr Kumar said. “Spending more is not a sustainable practice.”