Inflation Burns

The consumer price index (CPI) jumped 0.8% in February after rising 0.6% in January. The CPI leapt 7.9% from a year ago, the hottest annual increase since January 1982.

Energy prices surged 3.5% during the month; prices at the gas pump jumped 6.7% and have already moved higher in response to Russia’s invasion of Ukraine. The price of regular gasoline jumped to a record high as the U.S. and UK decided to ban oil imports from Russia.

Russia is the third largest oil producer in the world; only Saudi Arabia and the United States are larger. Even though we do not buy much from them, oil prices are set in response to global supply and demand. Low inventories going into the crisis amplified recent gains.

Food prices surged 1.0% in February in response to higher oil prices and the invasion of Ukraine. Oil boosts the cost of energy, feed and fertilizers, while Ukraine is one of the world’s largest grain producers. The devastation of the war in Ukraine will mean many of those crops will not be planted this year.

This is adding to already high food prices. Everything from cereals to proteins have accelerated in price. Meat, fish, poultry and eggs slowed in January only to pick up again in February. Even peanut butter has jumped in price as consumers attempt to substitute away from more expensive sources of proteins.

Costs are escalating across the board for restaurants, which is squeezing their margins. Restaurants raised prices, though prices for meals at workplaces and schools dropped.

Core CPI, which strips out the volatile food and energy components, rose 0.5% during the month. Core CPI leaped 6.4% from a year ago, the fastest annual pace since August 1982.

A gain in new vehicle prices partially offset a drop in used vehicle prices. New and used vehicle prices largely offset each other, while home furnishings and appliances prices continued their upward march. Large backlogs and the surge in home buying we saw at the start of this year has kept the upward pressure on goods for the home.

This is at the same time that services inflation is picking up. Hotel room rates surged after collapsing during the Omicon wave, while rents and homeownership costs continued to gain momentum.

Shelter costs have now hit the peak achieved during the height of the housing bubble in 2007 and are poised to accelerate in the months to come. Vacancies on rental properties have dropped to record lows in the hottest markets, while much of the increase in home values in 2021 has yet to show up in home ownership costs.

Medical costs remained tepid.The largest increase was in hospital costs, where a return of elective surgeries and acute labor shortages are pushing up costs. Many rural hospitals are now close to failing due to acute staffing shortages, which were exacerbated by COVID.

Finally, transportation costs jumped 1.4% during the month, partly from a sharp 3.5% pickup in rental vehicle costs. Air fares also skyrocketed as throughput at TSA checkpoints exceeded pre-pandemic levels during the month.

Another worrisome trend is inflation expectations, which have moved up over the last year. This is something that the Federal Reserve watches closely as it suggests that inflation may be having a larger impact on consumer behavior. The risk is that the inflation we are enduring now could become more entrenched, as it did in the 1970s. That is why the Fed is so wedded to raising rates starting in March.

Bottom Line
The Fed has a key role to play in that cooling and is now primed to act, crisis in Eastern Europe or not. What would stop the Fed from acting? A large seizure in credit markets that causes an even harder landing than a Fed-induced slowdown.

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