An inflation measure that the Federal Reserve closely watches accelerated again in January, hitting a new 40-year high and accelerating monthly as food and energy prices surged.
The Personal Consumption Spending Index, which is targeted by the Fed because inflation has averaged 2% annually over time, has grown 6.1% over the past year, the fastest pace since 1982. Prices are up. 0.6% in January since December, up from 0.4 percent month-on-month.
The refreshing reminder that inflation remains high comes at a tense time, as Russia’s invasion of Ukraine sends oil and other commodity prices higher and promises to further drive inflation.
The Fed has been preparing to gradually withdraw economic support during the pandemic in an effort to cool consumer demand and adjust prices. The White House is monitoring inflation closely as soaring food, rent and gas prices shake consumer confidence and dent President Biden’s approval ratings ahead of the midterm elections on Tuesday. November.
The new inflation reading shouldn’t surprise economists or policymakers – the Personal Consumption Spending figure is fairly predictable as it’s based on more quickly released Consumer Price Index figures , along with other available data. But it would reaffirm that the price increase, which was supposed to be temporary as the pandemic economy reopened, has instead lasted for nearly a full year and spread to areas not affected by the coronavirus. .
Rapid price increases have impacted a wide range of products and services, including used cars, beef, chicken, restaurant meals and home furnishings, and a number of trends are at risk. causing inflation to rise. Notably, wages are rising rapidly and employers are finding that they can pass on escalating labor costs to shoppers.
Economists are also keeping a wary eye on the conflict in Ukraine, which has sent oil and gas prices up and likely pushed commodity costs higher.
Researchers at Goldman Sachs estimate that a $10 per barrel increase in oil would increase key inflation in the United States by a fifth of a percentage point while reducing economic output by just under a tenth of a percentage point.
While it’s not clear how much gas prices will go up – that depends on the depth of the conflict, the scope of sanctions and Russia’s response – prices on some commodities have moved higher.
Brent crude, the global benchmark, increase at most 6 percent to more over $100 a barrel on Thursday after Russia’s invasion of Ukraine and could climb even higher as Russia responds to sanctions from the United States and Europe, before adjusting somewhat. Russia is a major energy exporter to Europe.
“Potentially, Russia could retaliate by restricting oil exports,” Patrick De Haan, head of oil and gas analysis at GasBuddy, said on Thursday. Prices at the pump are likely to reflect the fallout from the conflict almost immediately, he said.
Some economists have noted an unpleasant precedent when it comes to a gasoline shock.
The soaring energy prices of the 1970s contributed to the exacerbation of inflation, making price increases rapidly an enduring feature of the economy, a trait that only faded after a painful response from the Fed. The central bank pushed interest rates – and unemployment – into double digits to pull prices up to a peak in what is now known as the “Great Inflation”.
That episode comes after years of rapid price increases in which the Fed has been slow to cut prices. This time, the central bank is preparing to pull support back in time.
The Fed is expected to begin a series of rate hikes in March, policy moves that will slow lending and spending, which could lead to weaker hiring, low economic growth and a more modest price increase.
Julia Coronado, founder of MacroPolicy Perspectives, said: “The Ukraine situation has not changed, it is likely that the fundamental conclusion is that it is time for a change in monetary policy. “They won’t just delay all the rate hikes because there’s a war in Ukraine.”
Christopher Waller, the Fed governor, said in a speech on Thursday night that conflict could contribute to instability, but for now, the Fed should quickly pull back support for the economy to try to keep it under control. control high inflation “alarmingly”.
He suggested that if Friday’s inflation report, along with other upcoming data “indicates that the economy is still performing extremely hot, it could make a strong case” for an increase. interest rates added half a percentage point in March, twice the size of the usual increase.
Fed officials be willing to argue Whether larger-than-usual increases are warranted at their meeting next month.
While the Fed officially targets negative inflation, it also carefully tracks a core price measure that eliminates fuel and food costs, both of which rise from month to month. Core inflation rose 5.2% in January year-over-year, the fastest pace since 1983. It rose 0.5% monthly for four consecutive months.
Annual inflation should start to mechanically slow down some months in the coming months, as prices measured against stronger indicators from last spring, when inflation first started to pick up. up. Fading government support is also based on household income, this could eventually help slow spending somewhat.
However, the bullish moderation may be more muted than previously expected by economists and policymakers, thanks in part to the potential for increased energy costs as the conflict in Ukraine escalates. ladder.
While the Fed has the primary responsibility for controlling inflation by guiding economic demand, the White House is trying to devise policies to help supply catch up and has committed to doing what it can to keep it going. Oil and gas prices did not rise to uncontrollable levels during the Russian conflict.
“I know this is hard and Americans are hurting,” Mr. Biden said in a statement on Thursday. “I will do everything in my power to limit the pain the American people are going through at the gas pump. This is very important to me. But this aggression cannot go unanswered.”
Rising fuel prices are troubling consumers, but economic policymakers often try to consider them when setting policy because energy costs are so volatile. However, officials are watching closely to see if inflation continues to expand into categories less driven by supply constraints caused by the pandemic, such as rents and services. other or not.
Strong consumer spending has helped drive a rise in prices, giving companies the opportunity to charge more. Friday’s report also showed personal spending rose 2.1 percent in January from a year earlier, beating the central analyst forecast in a Bloomberg survey.
SeaWorld, the theme park chain, posted strong financial results in late 2021 as the brand managed to attract guests and charge higher fees even as many visitors from abroad remained at home thanks to the pandemic. happenning.
Elizabeth Castro Gulacsy, the company’s chief financial officer, said during the February 24 earnings call: “Our pricing and product strategies coupled with a strong consumer demand environment continue to drive pushing real prices higher and guest spending strong.
“We are operating in a good economic environment,” Marc Swanson, the company’s chief executive officer, later added. “So that’s obviously in our favor.”
However, even as the economy enters 2022 with hot consumption, policymakers will be watching to see if demand self-destructs as the government’s pandemic relief programs end and the Uncertainty stemming from Russia’s invasion of Ukraine threatens confidence.
“It is possible that the state of the world will be different after the Ukraine attack, and that could mean a more modest change in monetary policy is appropriate,” said Fed chief Waller. “But that remains to be seen.”
Ben Casselman contributed reporting.
https://www.nytimes.com/live/2022/02/25/business/stock-market-economy-news A key inflation gauge is still on the rise and war could make it worse