Inflation climbs to 7.9% annual rate, its highest level in 40 years

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Rising prices for everything from fuel and food to services and housing pushed the 12-month consumer inflation rate to 7.9% in February, the Labor Department said Thursday.

For the month, consumer prices rose 0.8%. On an annual basis, the inflation rate exceeded the extraordinary 7.5% recorded in February. “The 12-month increase has steadily increased and is now the largest since the period ending January 1982,” the report said.

Wages could not keep pace with soaring prices. Average inflation-adjusted hourly earnings fell 2.6% in February, according to a separate report released Thursday.

Pump pain: The price of gasoline plays a major role in the inflationary push. Over the past 12 months, gasoline prices have risen 38%, rising 6.6% in February alone. And that figure doesn’t include most of the huge price increases seen virtually every day since the Russian invasion of Ukraine.

More trouble to come: Some analysts believe prices will continue to rise, largely due to soaring energy costs, and expect to see inflation levels of 8% or more in the coming months. “The price shock that is now cascading through national and global economies will be captured in the coming months and, by our estimate, will push annual inflation to 10% or more,” said the firm’s economist Joe Brusuelas. of advice. RSM said in a note.

Michael Gapen, chief economist at Barclays, told Bloomberg it could take several weeks to peak. “Inflation is not expected to reverse and start falling for several months,” he said. “It sets the stage for where we are now. And we need to see how long this conflict lasts and how disruptive the sanctions regime really is,” he added, referring to the invasion of Ukraine and the economic sanctions imposed on Russia.

Headache for the Fed: The Federal Reserve is expected to go ahead with a quarter-point interest rate hike next week at its monetary policy meeting, but soaring inflation is creating a dilemma for the central bank. On the one hand, rate hikes seem even more necessary as part of the effort to control inflation. But soaring energy prices could trigger a recession, to which the authorities may be reluctant to contribute by continuing to raise rates.

“The Fed is in a tough spot,” Wells Fargo’s rate strategy director Michael Schumacher told CNBC. “It’s getting harder and harder every day. It’s tough anytime, but especially when you have incredible inflation, and we’ve had supply chain issues for some time, and now they’ve been exacerbated by Russia and Ukraine.

Many economists have estimated that the Fed will hike rates seven times this year, bringing the fed funds rate down to nearly 2%. But continued high inflation could mean fewer rate hikes. “I think if oil hits $150 and you see a break in the data somewhere, they could skip May for a bull,” said Barclays chief US economist Michael Gapen.

But much will depend on the data and what Fed officials see as the biggest threat. Diane Swonk, chief economist at Grant Thornton, said inflation fears could outweigh worries about a recession. “We got there with a lot of momentum. Oil price spikes don’t always cause recessions,” she told CNBC. “The Fed needs to hedge against what else it worries about. That is, inflation expectations have risen. The Fed needs to think about what the chances are of this more entrenched inflation like in the years 1970. They try to avoid this at all costs.

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