A key indicator of inflation showed another rally in January as Americans suffered more economic uncertainty exacerbated by Russia’s invasion of Ukraine.
The index of personal consumption expenditures – or PCE – released by the Commerce Department and considered the Federal Reserve’s preferred inflation gauge, rose to 5.2% in January from a year earlier.
In the 12 months through January, the PCE price index rose 6.1%. That was the biggest increase since February 1982 and followed a 5.8% year-on-year increase in December.
Data from the Commerce Department coupled with the ongoing crisis in Eastern Europe is likely to spur the Fed to raise interest rates at a larger pace than anticipated.
That’s because Russia is a major global oil producer, and any disruption to its output through sanctions or conflict could send oil prices sharply higher. Oil prices edged higher in anticipation of a breakdown down the road.
Higher oil prices can affect US consumers through more expensive gasoline and other energy costs – like heating oil. An increase in those prices will only push inflation higher — and prompt the Federal Reserve to raise interest rates to stave off price increases.
“Despite the war in Ukraine, the Fed will be forced to raise rates next month and they will have pressure to raise rates… at the same or faster rate than in the case of Russia not invading Ukraine,” said Chris Zaccarelli, Investment director of the Alliance of Independent Advisors, told The Post.
Russia’s invasion of Ukraine has raised concerns that the oil market could experience further shocks. Crude oil rose to $105 a barrel on Thursday.
Meanwhile, in the next two weeks, the average price of a gallon of gasoline in the US could reach $3.75. Experts warn if the geopolitical turmoil continues, it could hit $5 a gallon within months.
These factors will only strengthen the Fed’s determination to raise interest rates, observers say.
“Before inflation returns, the Fed will not need to raise rates in the face of war or other threats to economic growth, but in this situation, with inflation likely to become exacerbated by war disruptions, the Fed needs to do the opposite of what they normally do and that is to counter the even bigger inflation threat,” said Zaccarelli, noting the impact on oil markets. mine.
The PCE reported on Friday differs from the consumer price index, or CPI, released by the Labor Department. The CPI is even higher: It rose to 7.5% in January – also the fastest pace since 1982. Unlike CPI, core PCE does not include food and variable energy prices. motion.
Meanwhile, US household spending increased 2.1% in January, surpassing 0.8% in December. When adjusted for inflation, consumer spending rose 1.5% in January after falling 1.3% in December.
“Never underestimate the American consumer,” said Jennifer Lee, senior economist at BMO Capital Markets in Toronto.
https://nypost.com/2022/02/25/us-inflation-rising-how-ukraine-war-could-make-it-worse/ How the Ukraine war could make it worse