Sticker shock: Inflation in the United States rose 8.5% last year, the highest since 1981

WASHINGTON — Inflation rose last year at its highest rate in over 40 years, with the cost of food, gas, housing and other necessities squeezing American consumers and wiping out the wage increases many people have received .

The Labor Department said on Tuesday that its consumer price index rose 8.5% in March from 12 months earlier – the largest year-on-year increase since December 1981. Prices have been buoyed by tightening in supply chains, resilient consumer demand and disruptions to global food supplies Boosted and energy markets deteriorated by Russia’s war against Ukraine.

The government report also showed that inflation rose 1.2% in February-March compared to a 0.8% increase in January-February.

The March inflation figures were the first to capture the full rise in gasoline prices following Russia’s February 24 invasion of Ukraine. Moscow’s brutal attacks have unleashed sweeping Western sanctions on Russia’s economy and disrupted global food and energy markets. According to AAA, the average price of a gallon of gasoline — $4.10 — is up 43% year over year, though it’s been declining in recent weeks.

Escalating energy prices have resulted in higher transportation costs for shipping goods and components across the economy, which in turn has contributed to higher prices for consumers.

Recent evidence of rising prices will fuel expectations that the US Federal Reserve will aggressively raise interest rates in the coming months to try to curb borrowing and spending and tame inflation. Financial markets are now forecasting much steeper rate hikes this year than Fed officials signaled last month.

Even before the war in Russia fueled price increases, robust consumer spending, steady wage increases and chronic 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 CPI, have escalated, a trend that is unlikely to reverse anytime soon.

Economists point out that as the economy emerged from the depths of the pandemic, consumers gradually expanded their spending beyond goods and into more services. One consequence of this is that high inflation, which was initially mainly due to shortages of goods – from cars and furniture to electronics and sports equipment – is also appearing in services such as travel, healthcare and entertainment.

The expected rapid pace of Fed rate hikes will make borrowing significantly more expensive for consumers and businesses. Mortgage rates in particular have skyrocketed in recent weeks, although not directly affected by the Fed, making home buying more expensive. Many economists fear that the Fed has waited too long to hike rates and may end up acting so aggressively that it triggers a recession.

For now, the overall economy remains solid, with unemployment near a 50-year low and job vacancies near a record high. Still, skyrocketing inflation and its impact on Americans’ daily lives pose a political threat to President Joe Biden and his Democratic allies as they seek to maintain control of Congress in November’s midterm elections.

Economists generally doubt that even the sharp hikes expected by the Fed will bring inflation close to the central bank’s 2% target for the year by the end of this year. Tilley, economist at the Wilmington Trust, said he expects consumer inflation to still be 4.5% year-on-year through the end of 2020. Before the Russian invasion of Ukraine, he had forecast a much lower rate of 3%.

Inflation, which had been largely under control for four decades, began to accelerate last spring as the US and global economy recovered with unexpected speed and strength from the brief but devastating coronavirus recession that hit spring 2020 started.

The recovery, fueled by massive government spending and ultra-low interest rates, caught companies by surprise and forced them to scramble to meet rising customer demand. Factories, ports and rail yards struggled to keep up, leading to chronic shipping delays and price spikes.

Critics also partially blame the Biden administration’s March 2021 $1.9 trillion stimulus package, which included $1,400 in relief checks for most households, for overheating an already sizzling economy has contributed.

Many Americans have received wage increases, but the pace of inflation has more than wiped out those gains for most people. In February, average hourly wages fell by 2.5% year-on-year after adjusting for inflation. It was the 11th straight monthly decline in inflation-adjusted wages.

Copyright © 2022 by The Associated Press. All rights reserved. Sticker shock: Inflation in the United States rose 8.5% last year, the highest since 1981

Dais Johnston

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