WASHINGTON (AP) — Inflation has soared over the past year at its fastest pace in more than 40 years, with the costs of food, gas, housing and other necessities pressing American consumers and wiping out the pay raises many people have received.
The Labor Department said Tuesday its consumer price index jumped 8.5% in March from 12 months earlier — the biggest year-over-year increase since December 1981. Prices have been pushed higher by bottlenecked supply chains, strong consumer demand and disruptions in global food and energy markets made worse by Russia’s war against Ukraine.
The government report also showed that inflation increased by 1.2% from February to March, compared to an increase of 0.8% from January to February.
The March inflation figures were the first to capture the spike in gasoline prices that followed the Russian invasion of Ukraine on Feb. 24. Moscow’s brutal attacks triggered far-reaching Western sanctions against the Russian economy and disrupted global food and energy markets. According to AAA, the average price of a gallon of gasoline – $4.10 – is up 43% from a year ago, although it has fallen over the past two weeks.
Escalating energy prices have led to higher transportation costs for shipping goods and components across the economy, which in turn has contributed to higher prices for consumers.
The latest evidence of accelerating prices will bolster expectations that the Federal Reserve will aggressively raise interest rates in the coming months in an attempt to slow borrowing and spending and bring inflation under control. Financial markets are now pricing in much steeper rate hikes this year than announced by Fed officials last month.
Even before the war in Russia had further spurred price increases, robust consumer spending, steady wage increases, and chronic supply shortages had propelled U.S. consumer inflation to an all-time high in four decades. Additionally, housing costs, which account for about a third of the consumer price index, have risen, a trend that doesn’t seem likely to reverse any time soon.
Economists point out that as the economy emerged from the depths of the pandemic, consumers gradually expanded their spending beyond goods to include more services. As a result, high inflation, which initially reflected mainly a shortage of goods – from cars and furniture to electronics and sports equipment – also appeared in services, such as travel, healthcare and entertainment.
The expected rapid pace of Fed rate hikes will make loans significantly more expensive for consumers and businesses. Mortgage rates in particular, although not directly influenced by the Fed, have skyrocketed in recent weeks, making buying a home more expensive. Many economists say they worry that the Fed waited too long to start raising rates and that it would end up acting so aggressively that it would trigger a recession.
For now, the economy as a whole remains strong, with unemployment near a 50-year low and job openings near record highs. Yet soaring inflation, with its impact on the daily lives of Americans, poses a political threat to President Joe Biden and his Democratic allies as they seek to retain control of Congress in the midterm elections. of November.
Economists generally express doubts that even the large rate hikes expected from the Fed will manage to reduce inflation anywhere near the central bank’s annual target of 2% by the end of the year. end of this year. Wilmington Trust economist Tilley said he expects year-over-year consumer inflation to still be 4.5% by the end of 2020. Before the invasion of Ukraine by Russia, he had predicted a much lower rate of 3%.
Inflation, which had been largely under control for four decades, began accelerating last spring as the US and global economies rebounded with unexpected speed and strength from the brief but devastating coronavirus recession that began in spring 2020.
The recovery, fueled by huge injections of government spending and rock-bottom interest rates, has taken businesses by surprise, forcing them to scramble to meet growing customer demand. Factories, ports and freight yards have struggled to keep up, leading to chronic shipping delays and price spikes.
Critics also blame, in part, the Biden administration’s March 2021 $1.9 trillion stimulus package, which included $1,400 relief checks for most households, of contributing to overheating. an already sizzling economy.
Many Americans received pay raises, but the pace of inflation more than wiped out those gains for most people. In February, after taking inflation into account, the average hourly wage fell by 2.5% compared to the previous year. It was the 11th consecutive monthly drop in inflation-adjusted wages.