An inflation measure closely monitored by the Federal Reserve accelerated again in January, reaching a new high in 40 years and accelerating on a monthly basis as food and energy prices rose sharply.
The personal consumption expenditure index, which the Fed is targeting as it targets an average annual inflation rate of 2 percent over time, has risen 6.1 percent over the past year, the fastest rate since 1982. prices rose 0.6 percent in January, compared to 0.4 percent the previous month in December.
The data, released Friday by the Commerce Department, was another reminder that inflation remains stubbornly high as Russia’s invasion of Ukraine sends oil and other commodity prices soaring and promises to continue to boost inflation.
The Fed is preparing to steadily withdraw its economic support from the pandemic era in an effort to cool consumer demand and tame prices. The White House is keeping a close eye on inflation as rising food, rent and gas prices shake consumer confidence and dent President Biden’s approval ratings ahead of November’s midterm elections.
The new inflation measure won’t surprise economists or policymakers – the personal consumption expenditure figure is fairly predictable because it’s based on consumer price index numbers that are coming out sooner, along with other data already available. But it reaffirms that price hikes, which were expected to prove temporary as the pandemic economy reopens, have instead lasted nearly an entire year, seeping into areas unaffected by the coronavirus.
Rapid price increases have affected a wide variety of products and services, including used cars, beef, chicken, restaurant meals and home furnishings, and several trends threaten to keep inflation high. In particular, wages are rising rapidly and employers are finding that they can pass on their rising labor costs to shoppers.
Economists are also wary of the conflict in Ukraine, which has already sent oil and gas prices soaring and is likely to push up commodity costs even further.
Goldman Sachs researchers estimate that an increase of $10 a barrel of oil would increase headline inflation in the United States by one-fifth of a percentage point, while decreasing economic output by just under one-tenth of a percentage point.
While it’s not clear how much gas prices will rise – it depends on the depth of the conflict, the scope of sanctions and Russia’s response – several commodity prices have already risen.
Brent crude, the global benchmark, rose as much as 6 percent to more than $100 a barrel on Thursday after Russia invaded Ukraine and could rise further as Russia responds to US and European sanctions, before moderating somewhat. Russia is a major exporter of energy to Europe.
“Russia could potentially retaliate by restricting oil exports,” Patrick De Haan, chief of petroleum analysis at GasBuddy, said Thursday. Pump prices are likely to reflect the effects of the conflict almost immediately, he said.
Some economists have noted an uneasy precedent when it comes to a gas shock.
Rising energy prices in the 1970s helped exacerbate inflation, making rapid price increases a lasting feature of the economy, a feature that only faded after a painful response from the Fed. The central bank pushed interest rates – and unemployment – into double digits to spark price hikes during what is now known as Great Inflation.
That episode came after years of rapid price increases that the Fed had been slow to experience. This time, the central bank is gearing up to withdraw support quickly.
The Fed is expected to initiate a series of rate hikes in March, policy moves that should slow lending and spending, which could translate into weaker hiring, more subdued economic growth and more modest price increases.
“The situation in Ukraine is unlikely to change the fundamental conclusion that it is time to change monetary policy,” said Julia Coronado, founder of MacroPolicy Perspectives. “They are not going to suspend all rate hikes just because there is war in Ukraine.”
Christopher Waller, a Fed governor, said in a speech Thursday evening that the conflict may contribute to uncertainty, but that the Fed must immediately withdraw its support to the economy for the time being to try to control “alarming” high inflation.
He suggested that if Friday’s inflation report, along with other upcoming data, “indicate the economy is still running extraordinarily hot, a strong case can be made” to raise interest rates by half a percentage point in March, twice as much as the usual rise.
Fed officials appear ready to debate whether a more-than-usual hike is warranted at their meeting next month.
While the Fed is officially pursuing headline inflation, it’s also closely monitoring a core pricing move that cuts out fuel and food costs, both of which fluctuate from month to month. Core inflation rose 5.2 percent in January from the previous year, the fastest rate of increase since 1983. It posted a monthly increase of 0.5 percent for four consecutive months.
Annual inflation should start to slow down mechanically sometime in the coming months, as prices are set against stronger results from last spring, when inflation first started to pick up. Decreasing government support is also weighing on household incomes, which may ultimately lead to a decline in expenditure.
But the moderation in price increases could prove more moderate than economists and policymakers had previously expected, thanks in part to the potential for rising energy costs as the conflict in Ukraine escalates.
While the Fed has primary responsibility for controlling inflation by directing economic demand, the White House is trying to roll out policies to help catch up with supply and has pledged to do what it can to prevent oil from falling. – and gas prices rise to unsustainable levels during the Russian period. conflict.
“I know this is difficult and Americans are already in pain,” Biden said during a speech on Thursday. “I will do everything I can to limit the pain the American people feel at the gas station. This is critical to me. But this aggression cannot go unanswered.”
Rising fuel prices are painful for consumers, but economic policymakers generally try to ignore them when setting policy because energy costs are so volatile. But officials are keeping a close eye on whether inflation continues to spread to categories less driven by pandemic supply constraints, such as rent and other services.
Strong consumer spending has fueled price increases, giving companies the means to charge more. Friday’s report also found that personal spending rose 2.1 percent in January from the previous year, which beat the central analyst’s forecast in a Bloomberg poll.
SeaWorld, the amusement park chain, posted strong financial results at the end of 2021 as the brand managed to attract guests and demand more, even as many travelers from abroad stayed at home due to the ongoing pandemic.
“Our pricing and product strategies, along with strong consumer demand, continued to drive higher realized prices and strong guest spending,” said Elizabeth Castro Gulacsy, the company’s chief financial officer, during an earnings call on Feb. 24.
“We operate in a good economic environment,” Marc Swanson, the company’s CEO, added later. “So that obviously benefited us.”
But even as the economy enters 2022 with warm consumption, policymakers will look to see if demand declines on its own as government emergency programs dwindle and uncertainty from Ukraine’s invasion threatens confidence.
“The world may look different after the attack in Ukraine, and that may mean a more modest” change in monetary policy is in order, said Fed Mr Waller. “But that remains to be seen.”
Ben Casselman reporting contributed.
