U.S. inflation hit a new four-decade high of 7.9% in February, the Labor Department said Thursday as Russia’s invasion of Ukraine sent energy prices soaring.
Prior to the Ukrainian crisis, economists and policymakers were hoping for a peak in annual inflation this spring as supply chains recover from pandemic-related disruptions and the Federal Reserve begins an expected series of interest rate hikes next week. But the start of the war pushed up the prices of oil, wheat and precious metals sharply, threatening a more sustained rise in inflation.
“We thought inflation would come down, especially with the untangling of the global supply chain, but we don’t know how what’s happening in Ukraine will affect that,” said Joel Naroff, chief economist at Naroff Economics LLC.
Russia’s attack on Ukraine helped lift the price of oil above $100 a barrel for the first time since 2014. Here’s how rising oil prices can further increase inflation in the US economy. Photo illustration: Todd Johnson
High inflation before the war in Ukraine was primarily driven by high demand for goods, delivery bottlenecks, and shortages in goods such as semiconductors. Fed officials were poised for higher inflation earlier in the year, but recent trends are higher than expected. Housing and food prices soared, and hints of lower prices in the used car market were overshadowed by further disruptions in new car production.
The economic turmoil caused by Russia’s invasion of Ukraine and the global backlash could further fuel inflation, in part because Russia is the world’s largest supplier of oil and natural gas. One rule of thumb referred to by Fed Chairman Jerome Powell last week is that a $10 a barrel increase in oil prices raises headline inflation in the US by 0.2 percentage points. Brent crude, the global oil benchmark, is up about $40 a barrel since the start of the year. Russia is also a major player in the global markets for metals used in the manufacture of cars and aircraft, as well as components for fertilizers, which are a large cost item in food production.
The average price of gasoline in the country, not adjusted for inflation, hit a new high this week.
Photo: Mandel Ngan/Agence France-Presse/Getty Images
Because of Russia’s role in global energy and other commodity markets, “at least for the time being, we will face upward pressure on inflation,” Mr. Powell told the Senate Banking Committee last week.
Mr. Powell said he expects the central bank to raise rates by a quarter of a percentage point at its March 15-16 meeting, with more hikes to follow later this year. The plan was formulated before the invasion of Ukraine.
“I do think it would be appropriate for us to proceed in the same direction that we had in mind before the invasion of Ukraine happened,” Mr. Powell said. “In this very challenging time, it’s important for us to be careful about how we conduct policy, simply because things are so uncertain and we don’t want to increase that uncertainty.”
On Sunday, the nation’s average gasoline price topped $4 a gallon for the first time since 2008, according to AAA data that tracks retail prices daily. By Wednesday, prices reached their highest level ever before adjusting for inflation.
Soaring energy and commodity prices are the latest challenge for businesses that 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, California, was delighted to see his business rebound after a tough two years in which in-person events dried up and planning for the future seemed impossible. But rising labor costs and lack of stability in food and gas prices have hurt businesses.
“We can pass on some of the costs to clients, but a lot of people have contracted at lower prices,” and rising costs have eaten into his profits, Mr. Merritt said.
To hedge against future price increases, Elaine Bell Catering has begun to include an inflation factor in new contracts. “We’re giving them the best price we can if they had an event today,” added Mr. Merritt. “But when we usually book things 18 months in advance, we should value it more like a CPI-adjusted long-term contract.”
SHARE YOUR THOUGHTS
What are your views on inflation? Join the discussion below.
Some economists believe that inflation is likely to peak soon, possibly as early as this month. But the war in Ukraine increases the chances that the peak will be higher and the descent to lower levels will take longer, they say.
“Momentum on the supply chain front has been disrupted by the war,” said Cathy Bostancic, chief economist at Oxford Economics. Now it has raised its expectations for annual inflation at the end of 2022 to closer to 4%, not 3%.
Going forward, policy makers’ biggest concern is that higher wages will put pressure on inflation, forcing companies to raise prices to reflect labor costs. However, the average hourly wage in the private sector rose by a seasonally adjusted 5.1% in February compared to the previous year, below the rate of inflation.
Nitin Kumar, a Herndon, Virginia resident who works for a financial technology company, was grateful for a “significant raise” in early 2022, but after seeing the rate of inflation, he wondered how far his money was going. He considers whether he should shop at a discount grocery store or take other savings measures.
“I need to start thinking about what I can do myself, like walking more instead of driving,” Mr Kumar said. “It’s an unsustainable practice to spend more.”
Write to Gabriel T. Rubin, [email protected]
Copyright © 2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8