Households shrink as US consumer prices accelerate; More pain to come

WASHINGTON (Reuters) – U.S. consumer prices rose in February, forcing Americans to dig deeper to pay rents, food and gasoline, and inflation is expected to accelerate further as Russia’s war against Ukraine increases costs for crude oil and other goods.

The broad price hike reported by the Labor Department on Thursday led to the largest annual increase in inflation in 40 years. Inflation was already chasing the economy before the Russian invasion of Ukraine on February 24, and it could erode President Joe Biden’s popularity.

The Federal Reserve is expected to start raising interest rates next Wednesday. With inflation nearly four times the US central bank’s 2% target, economists expect up to seven rate hikes this year.

Low-income families bear the brunt of high inflation as they spend more of their income on food and gasoline.

“Consumer shock from the rapid rise in gas prices at the pump will continue to pressure the Federal Reserve and policymakers to do something, anything, to slow the speed of price increases everywhere,” said Chris Zaccarelli, chief investment officer at Chris Zaccarelli. Alliance of Independent Counsel in Charlotte, North Carolina.

The Consumer Price Index increased 0.8% last month after rising 0.6% in January. The 6.6% rebound in gasoline prices accounted for nearly a third of the increase in CPI. Gasoline prices fell 0.8% in January. Food prices jumped 1.0%, with the cost of food consumed at home rising 1.4%.

Fruit and vegetable prices have increased the most since March 2010, while the rise in the cost of dairy and related products was the largest in nearly 11 years.

In the twelve months through February, the CPI rose 7.9%, the largest year-over-year increase since January 1982. That followed a 7.5% jump in January and was the fifth consecutive month of annual CPI readings north of 6%. The rise in CPI in February was in line with economists’ expectations.

Last month’s CPI data does not fully reflect the rise in oil prices after the outbreak of the war in Ukraine. Prices jumped more than 30%, with global benchmark Brent crude reaching a 2008 high of $139 a barrel, before easing back to trade around $112 a barrel on Thursday.

The United States and its allies have imposed harsh sanctions on Moscow, with Biden on Tuesday banning imports of Russian oil into the United States. Russia is the second largest exporter of crude oil in the world.

AAA data showed that US gasoline prices averaged $4,318 a gallon, compared with $3,469 a month ago.

Biden on Thursday acknowledged the difficulties Americans face from skyrocketing prices, but blamed the actions of Russian President Vladimir Putin.

“As I said from the start, there will be costs at home as we are imposing crippling sanctions in response to Putin’s gratuitous war, but the Americans can tell, and the costs we are imposing on Putin and his cronies are far more devastating than the costs,” Biden said in a statement.

Soaring inflation wipes out wage gains. The Labor Department said inflation-adjusted average hourly earnings fell 2.6% year-on-year in February. Moody’s Analytics estimates that inflation at February levels was costing the average household $296.45 a month, up from $276 in January.

Economists expect the annual CPI rate to peak above 8% in March or April and begin to slow in the following months as high readings from last spring leak out of the account.

Stocks on Wall Street were lower. dollar (DXY.) Earned against a basket of currencies. US Treasury yields rose.

High rental costs

Inflation was fueled by a shift in spending on goods from services during the COVID-19 pandemic and trillions of dollars in relief from the government. The resulting rise in demand has been countered by capacity constraints as the spread of the coronavirus has pushed millions of workers out of the labor market, making it difficult to move raw materials to factories and final goods to consumers.

Excluding the volatile food and energy components, the CPI rose 0.5% last month after rising 0.6% in January.

The 0.5% increase in the cost of shelter such as rents, hotel rooms and motels accounted for more than 40% of the increase in the so-called base CPI. The cost of rent jumped 0.6%, the most since March 2005. Rental costs are flat and will keep core CPI hot.

Daniel Vernazza said: “Given the way rents are sampled in the CPI, and reshaped every six months, the index tends to lag other indicators such as the Zillow Observed Rent Index, which indicates that CPI rents will likely continue to rise strongly for some the time”. , chief international economist at UniCredit in London.

Consumers paid more for home furnishings and operations, auto insurance, as well as clothing and personal care. Air ticket prices rose 5.2% as a sharp drop in coronavirus infections boosted travel demand.

But prices for new cars rose slightly while used cars and trucks declined, indicating some decline in pent-up demand. Automobiles were one of the main drivers of inflation due to the global shortage of semiconductors.

In the twelve months through February, core CPI jumped 6.4%, the biggest year-over-year gain since August 1982, after rising 6.0% in January.

Despite high inflation, monetary tightening and conflict in Ukraine, no recession is expected. Labor demand is strong, with nearly 11.3 million jobs created at the end of January. Households have about $2.6 trillion in excess savings.

“The cost is high for consumers,” said Ryan Sweet, chief economist at Moody’s Analytics in West Chester, Pennsylvania. “However, there are also reasons to be optimistic that consumers can tolerate a temporary hike in gasoline prices, as household balance sheets are generally in good shape. Expenditure on gasoline as a share of total nominal consumption is low.”

Although a separate report from the Labor Department showed that initial claims for state unemployment benefits increased by 11,000 to a seasonally adjusted 227,000 for the week ending March 5, they remained at levels consistent with a tight labor market.

(Covering) Lucia Mutikani Editing by Shizuo Nomiyama and Paul Simao

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