Inflation is hitting the fastest pace since 1981, at 8.5% until March

Inflation hit 8.5 percent in the United States last month, the fastest pace of 12 months since 1981, as an increase in gasoline prices linked to Russia’s invasion of Ukraine added to sharp increases resulting from the collision of strong demand and stubborn pandemic-related supply shortages.

Fuel prices jumped to record levels in much of the nation and grocery costs rose, the Labor Department said Tuesday in its monthly report on the Consumer Price Index. The price pressure has been painful for American households, especially those who have lower incomes and spend a large portion of their budgets on necessities.

But the news was not uniformly bad: a measure that eliminates volatile food and fuel prices declined slightly from February when prices for used cars soared. Economists and policymakers took this as a sign that inflation in goods could begin to cool after climbing at a breaking pace for much of the past year.

In fact, several economists said March could be a flood mark for general inflation. Price increases may begin to decline in the coming months in part because gasoline prices have declined somewhat – the national average for a gallon was $ 4.10 on Tuesday, according to AAA, down from a peak of $ 4.33 in March. Some researchers also expect consumers to stop buying so much goods, whether furniture or outdoor equipment, that they can begin to reduce the pressure of congested supply chains.

“These figures are likely to represent a high point,” said Gregory Daco, chief economist at Ernst & Young’s strategy advisory firm, EY-Parthenon. Still, he said, it will be crucial to see if price increases excluding food and fuel – so-called core prices – slow down in the coming months.

A letup would be welcome news for the White House, as inflation has become a major liability for Democrats as midterm elections approach in November. Public confidence in the economy has fallen sharply, and because rapid price increases undermine support for President Biden and his party, they could jeopardize their control over Congress.

While inflation is rising across much of the world as economies adapt to the pandemic and share supply chain problems, core prices have risen more sharply in the United States than in places like Europe and Japan.

That has given Republicans a talking point, especially since prices are overwhelming recent wage growth. Average hourly earnings were up 5.6 percent in March, according to the Labor Department. But adjusted for inflation, the average wage was down 2.7 percent.

“The salaries of Americans are getting lower and lower every month,” said Sen. Patrick J. Toomey, a Republican from Pennsylvania. wrote on Twitter to the report.

While the Federal Reserve has primary responsibility for controlling inflation, the administration has taken steps to combat price increases. Mr. Biden announced Tuesday that a summer ban on sales of higher-ethanol gasoline blends would be lifted this year, a move that White House officials said was aimed at lowering gas prices.

The action follows the president’s decision last month to release one million barrels of oil from the US Strategic Petroleum Reserve over the next six months.

“I am doing everything in my power, by executive order, to bring down prices and tackle Putin’s price increase,” he said. Biden said in Iowa on Tuesday afternoon, referring to Russian President Vladimir V. Putin. Inflation had risen sharply in Ukraine before the war, though the conflict had contributed to pressure on energy and commodity prices.

There are a few hopeful signs that inflation could slow down in the coming months.

The first is largely mechanical. Prices started popping up last spring, meaning changes will be measured against a higher number of years ago in the coming months.

More fundamentally, the March data showed that prices for some goods, including used cars and clothing, fell moderately or even – although the signal was somewhat inconsistent, with furniture prices rising sharply. If rapid inflation in commodity prices disappears, it may help to reduce overall inflation.

“It’s very welcome to see the moderation in this category,” said Lael Brainard, a Fed governor and Mr. Biden’s nominated to be the next central bank vice-president, in an online appearance hosted by The Wall Street Journal. “I will look to see if we continue to see moderation in the coming months.”

Between the slowdown in gasoline prices this month and a potential easing of commodity prices, even economists who have long expressed concerns about inflation said it would begin to decline.

“It’s better than even chances are we will not see a figure above 8.5 percent this year,” said Jason Furman, a Harvard economist who has served as chairman of President Barack Obama’s Council of Economic Advisors.

But even if inflation slips slightly, it is likely to spend 2022 well above the Fed’s target, which defines it at 2 percent on average with a related but slower price index.

The critical question is how much and how fast prices will fall, and recent developments increase the risks that uncomfortably rapid inflation may remain.

The cost of services, including rent and other housing costs, is rising faster. These measures are moving slowly, and are probably an important factor in determining the course of inflation.

Wages are rising sharply, pushing up costs for employers and possibly encouraging them to raise prices. Businesses may feel they have the power to pass on rising costs to customers, and even expand their profits, as consumers continue to spend in a full year of rapid price increases.

And cheaper goods are not guaranteed. A coronavirus epidemic shuts cities and disrupts production in China, and the war in Ukraine adds an enormous dose of uncertainty about commodity prices and supply chain.

“The impact of these shocks on commodity prices, they could take a while to get through the economy,” said Tim Mahedy, senior economist at tax and advisory firm KPMG US

After a long spate of rapid inflation, the Central Bank of America is responding, instead of waiting to see what happens next. Fed officials began raising interest rates last month and have signaled that they will continue to push themselves “quickly” as they try to curb lending, spending and demand, hoping to avoid steep price increases becoming a permanent feature of the U.S. economy.

“It’s been a shock: we went for a decade in which we could not bring inflation down to 2 percent,” Christopher J. Waller, a Fed governor, said during an event on Monday. “We hope it will go away relatively quickly, that is our job, and we will get it done.”

Policymakers are expected to make a half-point rate hike at their meeting in early May, and have indicated they will soon begin to shrink their bond holdings rapidly, a change that should boost higher rates and ease demand. Ms. Brainard suggested Tuesday that such a plan could be announced as early as May, and could go into effect as early as June.

While she predicted that consumer demand would decrease in the coming months as the government provided less financial aid to households than in 2021 and as borrowing costs rose, Ms. Brainard cited the war in Ukraine and Chinese lockdowns as risks that could limit supply and keep inflation high.

In a recent Bloomberg poll of economists, the median inflation forecast for the last three months of this year was 5.4 percent over the previous year – well above the Fed’s target. Businesses and consumers regularly say that rapid inflation is disrupting their economic life, and many worry that it will not evaporate soon.

“Even if the economy slows down, it will not feel like it’s slowed down for the builders, for people who own construction products, to the trucking companies,” said Crissy Wieck, chief salesman at the Western Express trucking company, during a Fed-hosted panel on Monday.

She noted that trucks typically buy trucks when the demand for shipping is as high as it is now, driven by the promise of high wages – but due to a truck shortage, that extra capacity could be years away.

“That supply chain and supply-demand ratio will not correct,” she said.

Ben Casselman en Ana Swanson contributed reporting.

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