US inflation reached 7.9% in February hitting new 40-year high

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US consumer price growth approached 8 per cent last month ahead of a surge in energy prices following Russia’s invasion of Ukraine, raising pressure on the Federal Reserve to more substantively tighten monetary policy.

The consumer price index increased another 0.8 per cent between January and February, following a 0.6 per cent monthly increase in the previous period, the Bureau of Labor Statistics said on Thursday. Prices were fueled by higher energy, food and shelter costs.

From a year ago, prices are up 7.9 per cent, the fastest annual increase since January 1982. Once highly volatile items like food and energy were stripped out, “core” CPI jumped 6.4 per cent over that period, or 0.5 per cent on a month-to-month basis.

The latest report captures the period just before Russia launched a full-scale attack on Ukraine and western allies unveiled among the most punitive financial penalties ever levied on a country, including a US ban on Russian energy imports.

The actions caused global energy markets to seize up, sending gas and oil prices rocketing. Prices for wheat, nickel and other commodities also sourced.

Even before the invasion, a 6.6 per cent jump in gasoline prices accounted for nearly a third of the monthly CPI increase, according to the BLS. The broader energy index rose 3.5 per cent in February, a substantial pick-up from the 0.9 per cent increase in January. Energy prices are now roughly 25 per cent higher than the same period a year ago.

Food prices climbed by the most since April 2020, rising another 1 per cent month-on-month in February as all six major grocery store food indices reported gains. The broader index is up nearly 8 per cent in the past 12 months.

More than 40 per cent of the monthly increase in core CPI stemmed from a 0.5 per cent jump in shelter costs, the BLS said, with rent up another 0.6 per cent and hotel expenses up 2.2 per cent after a decline in January.

Owners’ equivalent rent, a measure of what homeowners believe their properties would rent for, rose 0.4 per cent for a 4.3 per cent annual increase. These gains partially offset a decline in used car prices and some medical services.

The war in Ukraine is expected to push overall inflation even higher and delay the peak in the pace of consumer price growth that was broadly expected later this year.

Economists fear that a prolonged crisis could not only dent growth, but also further entrench inflationary pressures that have already begun to take root across a broad swath of the economy.

“The buzzword is stagflation,” said Alex Veroude, chief investment officer for North America at Insight Investments, referring to a scenario of slowing growth and rising prices. Though he said it is not yet clear if such an environment will emerge nor how the Fed will respond.

Market measures of inflation expectations have moved higher in recent days to reflect these concerns, with the popular two-year break-even rate climbing above 4 per cent after the invasion.

A swap rate that measures what five-year inflation expectations will be in five years’ time has also jumped, and at 2.7 per cent is well above the Fed’s 2 per cent core inflation target.

Geopolitical tensions are not expected to knock the Fed off course, with traders still penciling in at least six interest rate increases this year. However, the conflict may complicate the path forward for policy after the first adjustment.

The Fed is set to proceed with a quarter-point interest rate this month, and will then seek to move the federal funds rate closer to a level that neither aids nor constrains economic activity — also known as neutral rate and estimated to be between 2 and 2.5 per cent.

Half-point interest increases, which have not been used in more than two decades, are firmly on the table for one or more meetings, Powell said. He also acknowledged that it may be appropriate to lift rates above neutral, increasing the risk of a recession.

Brian Smedley, chief economist at Guggenheim Partners, expects the Fed to proceed movingly, however, despite having to grapple with an “enormous commodity supply shock” that he says is likely to further boost inflation.

“Given the big increase in uncertainty that markets are grappling with as well as businesses and consumers, this eases the pressure on the Fed to do anything more than a 25 basis point hike,” he said.

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