Inflation Soars to Highest Rate Since 1981 After Huge Spike in Gas Prices
Consumers just can’t seem to catch a break. The inflation rate is increasing at the fastest pace since the early 1980s, in large part due to soaring prices for energy, vehicles and food.
Inflation has been a top concern for months, and in March, the situation got even grimmer. Consumer prices jumped 8.5% from the prior year, according to new data from the Bureau of Labor Statistics (BLS) released Tuesday. The BLS says that’s the largest 12-month increase since December 1981. Compared to February, overall prices rose 1.2%.
The BLS data confirms what was widely expected. On Monday, White House Press Secretary Jen Psaki told reporters that Biden administration was expecting “extraordinarily elevated” inflation in March due to “Putin’s price hike.”
Analysts had accurately predicted March’s inflation rate to hit about 8.5%. In February, the inflation rate was 7.9%.
Inflation remains historically high for several pandemic-related reasons including pent-up consumer demand and ongoing supply-chain issues. Lately, the tight labor market and, by extension, higher wages have been getting a lot of attention as contributors to inflation.
A new report from Adobe suggests that supply-chain issues are still very much contributing to higher prices. Adobe says online shoppers saw more than 3 billion out-of-stock messages in March, an increase from February. Often when businesses face supply issues, they hike prices.
“Of the $83.1 billion spent by consumers in March, $2.8 billion was driven by higher prices,” the report states. “In other words, consumers paid $2.8 billion more for the same amount of goods.”
Russia's role in surging inflation and gas prices
March’s inflation report is also the first one to give us a full month’s picture of how the Russian-Ukrainian war affected U.S. prices. The conflict may be far away, but it's only worsening the U.S.'s inflationary woes.
"The fallout of the Russian invasion on the U.S. economy has become meaningfully more problematic," Mark Zandi, chief economist at Moody's Analytics, wrote in a research note Monday.
While more economic blowback may follow, what’s clear so far is that energy prices for Americans are soaring due to the conflict. From February to March, prices for all types of gasoline increased an astonishing 18%, while fuel oil prices rose 22%. Energy prices overall jumped 32% in the 12 months ending in March. During that same period of time, fuel oil shot up 70%, and all types of gasoline increased 48%.
Last month, President Biden banned the import of Russian oil, natural gas and coal in a bid to cripple Russia’s economy, but the move also impacts how much everyday Americans pay at the pump.
“This is a step we’re taking to inflict further pain on Putin, but there will be costs as well here in the United States,” Biden said in a speech announcing the import ban on March 8.
Shortly after, gas prices surged well above $4 a gallon nationally and, for the first time ever in any city, exceeded $6 in Los Angeles, on average. While the national average still sits above $4, prices in most states have thankfully begun dropping below that level.
Gas prices have become a flash point for inflation for many Americans due to how reliant our day-to-day lives are on gasoline. As of Tuesday, the average price for a gallon of regular gas was $4.10, compared to $2.86 a year ago.
To combat out-of-control gas prices, Biden is announcing Tuesday that his administration will temporarily allow the sale of 15% ethanol gas over the summer months, which is usually restricted due to anti-pollution measures. Experts say that could yield a modest discount, as that type of gas sells up to 10 cents cheaper per gallon.
According to the BLS, so-called "core inflation," which excludes energy (including gasoline) and food prices, rose 6.5% last month.
In recent weeks, inflation has become the largest economic concern for Americans, according to a study by Gallup. As a result of soaring prices, many folks are also putting off big-ticket purchases, such as housing, new or used vehicles and electrical appliances.
The price of housing climbed 5% year over year. Used vehicle prices surged 35.3%, while the price for a new vehicle increased 12.5%.
Where inflation is worse
While the national inflation rate is 8.5%, residents in several regions and cities are facing price increases higher than that, especially folks in the South.
Inflation rates by region:
- South: 9.1%
- West: 8.7%
- Midwest: 8.6%
- Northeast: 7.3%
The BLS also tracks inflation in several key metropolitan areas. Here's a look at which cities are getting hammered by inflation.
- Tampa, Florida: 10.2%
- Riverside, California: 10%
- Denver: 9.1%
- Dallas: 9%
Can Fed rate hikes help lower inflation?
The Federal Reserve, aka the Fed, is also watching inflation closely. The Fed is America’s central banking system and is tasked with maintaining a healthy economy. It typically likes to see inflation at an average rate of about 2%.
Since inflation is far higher than that, the Fed has been trying to rein it in. To do so, it's pulling one of its core economic-policy levers: the federal funds rate. Basically, the Fed has the power to set the interest rate at which banks lend money to each other. Over the course of the pandemic, the rate has been at near zero. In March, the Fed decided to hike the rate for the first time since 2018, increasing it by 0.25%.
This rate can affect inflation in some not-so-obvious ways. In short, the rate hike makes borrowing money more expensive for businesses and consumers alike. As the monetary-policy logic goes: When the economy and labor market are burning red hot — as they have been — increasing interest rates can curb growth (and even induce a recession) to ultimately taper inflation.
Economists are expecting future rate hikes — and the Fed has suggested several throughout the remainder of the year — to be higher.
"[The surge in oil prices] is fanning already heated inflation and inflation expectations," Moody's Zandi wrote. "This has forced the Federal Reserve Board to accelerate its plan to tighten monetary policy."
The end goal is to reduce inflation to manageable levels by the second half of 2022, but it’s a delicate balancing act for the central bankers: Stay relatively hands off, and inflation potentially gets worse. Raise rates too high or too fast, and the economy spirals into a recession.
Now, economists are increasingly predicting that the latter is going to be the more likely scenario.
More from Money:
Is a Recession Coming Soon? This Bond Market Indicator Is Flashing Red