Inflation Report 2022: CPI up 7.9% over the last 12 months, the biggest increase since 1982

WASHINGTON — Driven by rising costs for gas, groceries and housing, consumer inflation rose 7.9% last year, the sharpest rise since 1982 and likely just a harbinger of even higher prices.

The increase, reported Thursday by the Labor Department, reflected the 12 months that ended in February and did not include most of the oil and gas price hikes that followed Russia’s February 24 invasion of Ukraine. Since then, average gas prices nationwide have risen about 62 cents a gallon to $4.32, according to AAA.

Even before the war, further accelerating price increases, robust consumer spending, robust wage increases and persistent supply constraints had pushed US consumer inflation to its highest level in four decades. In addition, housing costs, which account for about a third of the government’s consumer price index, have risen sharply, a trend that is unlikely to reverse any time soon.

Thursday’s government report also showed that inflation rose 0.8% in January-February, versus a 0.6% increase in December-January.

For most Americans, inflation is far ahead of the pay rises many have received over the past year, making it harder for them to afford basic necessities like groceries, gas and rent. As a result, inflation has become the top political threat facing President Joe Biden and Congressional Democrats as the midterm elections draw closer. Small business owners indicate in surveys that this is also their primary economic concern.

In a bid to stem inflation, the US Federal Reserve will raise interest rates several times this year, starting with a modest hike next week. But the Fed faces a tricky challenge: If it tightens credit too aggressively this year, it risks undermining the economy and potentially triggering a recession.

Energy prices, which had soared after Russia invaded Ukraine, rose again this week after Biden said the United States would ban oil imports from Russia. Oil prices fell on Wednesday after reports that the United Arab Emirates will urge other OPEC members to increase production. US oil fell 12% to $108.70 a barrel but still rose sharply from around $90 before the Russian invasion.

MORE: Here’s how President Biden plans to fight inflation in America

However, energy markets have been so volatile that it is impossible to know if the decline will continue. If Europe joins the US and UK in banning Russian oil imports, prices could soar to as high as $160 a barrel, analysts estimate.

The economic fallout from Russia’s war on Ukraine has turned a broad assumption on its head by many economists and the Fed: That inflation would ease this spring because prices rose so sharply in March and April 2021 that year-on-year comparisons are inconclusive would show a decline.

Should gas prices remain near current levels, Eric Winograd, senior economist at asset manager AllianceBernstein, estimates inflation could hit as high as 9% in March or April.

The cost of wheat, corn, cooking oils, and such metals as aluminum and nickel have also skyrocketed since the invasion. Ukraine and Russia are leading exporters of these goods.

Even before Russia invaded, inflation not only rose sharply, but also spread to other sectors of the economy. Many prices have skyrocketed over the past year as strong demand has met tight supplies of items such as cars, building materials and household goods.

But even for some services unaffected by the pandemic, like rents, costs are rising at the fastest pace in decades. Steady job growth and high house prices are encouraging more people to move into apartments, which has pushed up rental costs at the highest rate in two decades. The vacancy rate has reached its lowest level since 1984.

In the last three months of last year, wages and salaries rose by 4.5%, the largest such increase in at least 20 years. These wage increases, in turn, have prompted many companies to raise prices to offset their higher labor costs.

Rising energy costs pose a particularly difficult challenge for the Fed. Higher gas prices tend to accelerate both inflation and economic growth. Because when their paychecks are eroded at the pump, consumers typically spend less on other things.

This pattern is similar to the “stagflation” dynamic that made the economy of the 1970s miserable for many Americans. However, most economists believe the US economy is growing fast enough that another recession is unlikely even with higher inflation.

Copyright © 2022 by The Associated Press. All rights reserved. Inflation Report 2022: CPI up 7.9% over the last 12 months, the biggest increase since 1982

Dais Johnston

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