WASHINGTON (Reuters) – US consumer prices are expected to rise to their highest in 16-1/2 years in March as Russia’s war against Ukraine pushed gasoline costs to record highs, resulting in annual inflation since 1980. growing at its fastest pace since the beginning of the decade.
The Labor Department’s Consumer Prices report on Tuesday will seal the case for the Federal Reserve to hike interest rates by a whopping 50 basis points next month. It would show the unemployment rate dropping to a two-year low of 3.6% in March, based on data from the previous month.
In March, the US central bank raised its policy interest rate by 25 basis points, the first hike in more than three years. Minutes of the policy meeting published last Wednesday appeared to set the stage for a bigger rate hike down the road.
Sung Won Sohn, professor of finance and economics at Loyola Marymount University, said: “Inflation is peaking not only because of what is happening in Ukraine, but also because of what has happened in the past, such as massive government stimulus and Federal Reserve money. Printed.” in Los Angeles. “We should expect half a point growth next month.”
According to a Reuters survey of economists, the consumer price index is likely to rise 1.2% in March. This would be the biggest monthly gain since September 2005 and followed by a 0.8% advance in February. According to AAA, gasoline prices hit an average high of $4.33 per gallon in March.
Though petrol was the main driver of inflation last month, strong contribution was expected from food and services such as rental housing. Russia is the second largest crude oil exporter in the world. The United States has banned imports of Russian oil, liquefied natural gas and coal as part of a series of sanctions against Moscow for its invasion of Ukraine.
Russia and Ukraine are major exporters of commodities such as wheat and sunflower oil. Besides raising petrol prices, the Russia-Ukraine war, now in its second month, has caused a global jump in food prices.
Higher inflation readings and the Fed’s flurry have left the bond market fearful of a US recession, though most economists expect expansion to continue.
In the 12 months through March, the CPI forecasts a shootout of 8.4%. This would be the biggest year-on-year gain since January 1982 and follows a 7.9% jump in February. This will be the sixth straight month of annual CPI readings north of 6%.
Inflation at its peak?
Economists expect March to peak in the annual CPI rate, but caution that inflation will remain well above the Fed’s 2% target until at least 2023. Gasoline prices have retreated from record highs, although still remain above $4 per gallon.
Last year’s high inflation reading will also start falling from the CPI calculation.
“However, the decline in inflation for consumers, businesses and policymakers alike will be slow,” said Sam Bullard, a senior economist at Wells Fargo in Charlotte, North Carolina. “Services inflation, which includes housing, shows no sign of abating any time soon.”
Moderation in prices of used cars and trucks resulted in a decrease in monthly implied inflation readings.
Excluding volatile food and energy components, the CPI is projected to rise 0.5%, following similar progress in February. This would result in a 6.6% increase in the so-called core CPI in the 12 months through March, the biggest advance since August 1982 after rising 6.4% in February.
“Factors such as used cars and adverse base effects could lead to a clear slowdown in core inflation for a few months this spring,” said Veronica Clarke, an economist at Citigroup in New York. “This will likely be short-lived, with further risks from higher commodity prices and supply disruptions in the summer leading to a more bullish re-evaluation of expectations for the Fed in the market.”
The lockdown in China to prevent a resurgence in COVID-19 infections is seen putting more pressure on global supply chains, which could push up prices of goods. Separately, rising rents for housing is also expected to keep core inflation warm.
A key measure of rent, the rent equivalent to the owners’ primary residence, rose 4.3% on a year-on-year basis in February, the fastest since January 2007.
Economists say this gauge lags behind measures of private sector fares. While these measures are showing signs of slowing down, economists do not expect it to show up in CPI data for some time. Landlords cut rents at the start of the pandemic as people were in deserted cities, but the reopening of the economy has boosted demand for housing.
“A strong recovery in labor markets, rising labor income and a healthy household balance sheet should support rental demand, at least in the near term, even amid higher prices,” said Michael Pond, head of inflation research at Barclays in New York. “The peak in CPI rents may still be at least a quarter away, but given the recent moderation in private measures of rents, we would caution against extending the trend above pre-pandemic levels in 2023.”
Reporting by Lucia Muticani; Editing by Andrea Ricci