Inflation has proven to be one of the strongest features of the Covid economy, and it is a test for the White House and the Federal Reserve.
Prices rose 8.5% in March from the previous year, the largest annual increase since December 1981, when the Russian war in Ukraine sent energy prices skyrocketing.
The White House and the Federal Reserve have launched various initiatives to try to control inflation, but rising prices for gasoline, food and many other products still affect millions of Americans. The economy is now expected to grow at a slower pace later this year, in part because inflation is causing families and businesses to consider cutting back on purchases to protect their budgets.
Inflation data released Tuesday by the Bureau of Labor Statistics showed that prices rose 1.2% in March from February. Increases in gasoline, housing, and food prices were among the major contributors to inflation, underscoring the inevitability of these costs.
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Inflation has remained relatively stable, if not declining, for most of the past decade, but has rebounded significantly as the global economy emerged from the pandemic. Many economists and policymakers believe inflation will ease this year as supply chain problems and government stimulus measures fade. But the Russian invasion of Ukraine in February created a new wave of uncertainty and pushed prices higher.
Despite a relatively strong labor market, widespread inflation has caused major political problems for President Biden and Democrats. The administration has attempted to rename the recent spike in inflation the “Putin price hike.” But that rhetoric doesn't seem to lift Biden's support for the economy until mid-2022.
Attempts to isolate Russia also had consequences for the global economy, putting the supplies of oil, wheat, and other raw materials under new pressure.
Russia is one of the world's largest oil producers, and its invasion of Ukraine prompted the US government and others to try to restrict Russia's ability to sell energy. These moves have led to rising energy costs. Crude oil made new highs last month, which was quickly followed by a rise in gasoline prices.
The White House tried to correct the situation by releasing oil from the Strategic Petroleum Reserve. The Biden administration announced Tuesday that the Environmental Protection Agency will allow the sale of a type of blended gasoline in the summer to provide more supplies, although the exact results are unclear. Only 2,300 of the country's 150,000 service stations offer E15 gasoline, which will be affected.
The March inflation report showed the extent of the damage to the energy sector. Overall, the Energy Index is up 32.0% compared to last year. The gasoline index rose 18.3 percent in March after rising 6.6 percent in February.
Even with lower crude oil prices, the effect of the sticky bomb continues to widen people's wallets and distort their macroeconomic perceptions.
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Federal Reserve officials say the economy remains in a strong position, given the low unemployment rate and the relative strength of household budgets. But as it sets out to curb inflation, the Federal Reserve will cool the economy without completely draining it.
But it is not clear how much deflation awaits us or how months of inflation will slow economic growth.
“Anytime inflation picks up a little bit, you would expect real growth to be a little weaker,” said Mark Goldwyn, senior vice president and senior policy director at the Committee on Responsible Federal Budgeting. "We're getting to the point where inflation is killing production, in some ways."
The food index rose 1% in March compared to February. This is an 8.8% increase over the past 12 months, the largest increase since May 1981, and only some categories have changed. Breakfast cereals rose 2.4% from February to March. Prices of rice rose 3.2%, minced meat 2.1% and eggs 1.9%. Milk rose 1.3%, potatoes 3.2%, and canned fruits and vegetables 3.8%.
Rents are up 4.4% from a year earlier and 0.4% in March compared to February alone.
In eastern Massachusetts, food insecurity remains 30% higher than pre-pandemic levels, said Catherine D'Amato, president and CEO of the Boston Food Bank. D'Amato said one of the store's partners recently moved from 400 households each week to 500 households.
D'Amato said that such rampant inflation forces families to engage in difficult trade-offs as people decide to spend money on higher heating costs, higher gas costs or higher food costs.
"Everyone has their own inflation rate," D'Amato said. “If you have to put fuel in your car, or pay for things for your kids, or clothes, or utility bills, or your rent, you take money out of food.”
Just a few months ago, White House and Federal Reserve officials were hopeful that inflation would start dropping month after month. But those expectations were quickly eroded by the Russian invasion, excessive shutdowns in major Chinese manufacturing hubs, and the grim reality that inflation continues to ripple through all the cracks in the economy.
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"You can't escape from it, even if you wanted to," said Joe Brusolas, chief economist at RSM. It will last for some time."
Persistently high inflation comes amid growing concerns among economists and analysts of an impending economic slowdown. In March, Bank of America analysts lowered their estimate of growth in 2022 from 3.6% to 3.3%. The Federal Reserve also lowered its GDP forecast recently as officials warned that the war in Ukraine was throwing a lot of uncertainty into the global system.
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However, the March inflation report showed some optimism. Prices of used cars and trucks have weighed heavily on inflation as the global shortage of semiconductors has offset massive consumer demand. But in March, the used cars and trucks index fell 3.8%, marking a second consecutive monthly decline.
Inflation has proven to be one of the most visible features of the recovery from the pandemic, something that is directly affecting households across the country. Rents are rising, groceries are more expensive, and wages are eroding quickly for families trying to just cover the basics. Families don't expect quick change. Survey data from the Federal Reserve Bank of New York showed that in March 2022, US consumers expected inflation to be 6.6% over the next 12 months, down from 6.0% in February. It was the highest reading since the survey began in 2013 and a strong monthly increase.
In an effort to curb rising inflation, the Fed launched its first rate hike since the pandemic began in mid-March and decided on six more hikes later this year. In recent weeks, officials have indicated the possibility of larger increases in the coming months.
Five graphs showing why inflation is at its highest level in 40 years
“This year, inflation was expected to peak in the first quarter and eventually stabilize,” Federal Reserve Chairman Jerome H. Powell said in March. "This story has really fallen apart. As the interruption continues, my colleagues and I may come to the conclusion that we need to act faster."
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