Consumer prices increased 8.5% in the 12 months ending in March, a number that is sure to fuel consumer anxiety and erode support for President Joe Biden's agenda.
The inflation rate is now higher than at any time since December 1981, when the United States was still suffering the Great Inflation that helped bring President Ronald Reagan to office, according to the data released by the Bureau of Labor Statistics on Tuesday.
Inflation has increased greatly over the last several months, rising six-tenths of a percentage point just since February, and has eaten into Biden’s approval ratings. Consumer prices have increased progressively every month since last August, making staples like food costlier for consumers.
Energy prices have soared 32% over the past year, while food prices have surged 8.8%.
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“The war in Ukraine heavily influenced consumer prices in the month of March, nowhere more evident than the 18.3% monthly increase in gasoline prices," said Greg McBride, Bankrate's chief financial analyst. "Gas prices alone accounted for more than half of the monthly increase in the CPI, and over the past year, gas prices are up 48%. Food prices are also impacted, with food at home costs rising 1.5% just in the past month, further squeezing household budgets."
In some good news for the economy, used-car prices, which were previously a big driver of inflation, fell for the second month in a row.
High inflation has also hamstrung Biden’s desire to pass his ambitious spending agenda because some centrist lawmakers have said they are uncomfortable pumping more money into the economy during a time of such overheating.
The Federal Reserve announced last month that it would raise its interest rate target by a quarter of a percentage point, the first rate hike since 2018, in an effort to rein in the higher prices, although some economists and many Republicans say the central bank should have moved sooner to reverse its pandemic emergency measures.
Driven by hawkish statements by Fed Chairman Jerome Powell and other central bank officials, investors now expect the Fed to move much more aggressively with hiking interest rates in the coming months in light of the alarming numbers.
“The labor market is very strong, and inflation is much too high,” Powell recently said. “There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level and then to move to more restrictive levels if that is what is required to restore price stability.”
“If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so,” he added, suggesting that the central bank might try to hike rates by half a percentage point at its next meeting less than a month from now, a move that hasn’t been done in more than two decades.
Most investors now foresee a half-point hike in May, with the likelihood of the more aggressive rate hike occurring pegged at more than 83%, according to CME Group’s FedWatch tool, which calculates the probability using Fed fund futures contract prices.
Further adding to the inflationary flames is the war in Ukraine. The conflict has pushed energy prices through the roof because Russia is one of the world’s largest producers of oil and natural gas. Those price pressures are contributing to inflation more generally because producers have had to increase the price of certain goods to recoup the losses from higher energy costs.
The Biden administration on Monday attempted to preempt news of the high inflation reading. White House press secretary Jen Psaki told reporters that March’s numbers are expected to “be extraordinarily elevated due to [Russian leader Vladimir] Putin’s price hike.”
“We expect a large difference between core and headline inflation, reflecting the global disruptions in energy and food markets,” she said.
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The higher prices have blunted the country’s good economic news on the jobs front.
The unemployment rate fell two-tenths of a percentage point to 3.6% in March, a more aggressive drop than expected. Joblessness is now at the lowest level since right before the pandemic struck, when it was resting at about 3.5%.