Inflation accelerated to 8.5% in March, highest since 1981

Inflation accelerated to 8.5% in March, highest since 1981

Inflation hit a fresh 40-year record in March as U.S. consumer prices rose 8.5% from a year ago, the Labor Department said on Tuesday.

The Consumer Price Index, which tracks a basket of goods and services, jumped 1.2% in March after increasing 0.8% in February, showing that inflation gained speed last month. Core inflation, which strips out volatile food and energy costs, rose 6.5% from a year ago.

Nearly half the latest increase in inflation came from the rising cost of gas, which climbed 18% in March to reach a record-high average of $4.33 a gallon. Costs for food and shelter also surged, with airline fares, health and car insurance and furniture contributing to the increase.

More positively for consumers, used cars and truck prices, a major driver of inflation last year, fell 3.8% in March.

“Economic resilience will be tested”

Although prices continue to surge, some economists think inflation may have peaked and is likely to ease over the rest of the year.

“[T]he monthly increases in apparel, recreation, and food away from home were all smaller than in recent months, perhaps suggesting that the peak upward pressure on service-sector wages is over,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a research note.

Another faint silver lining is that core inflation — despite hitting the highest level since 1982 — wasn’t as bad as economists expected, tempered by falling prices of some goods and used cars in particular.

While it’s risible to ask households to overlook soaring prices at the gasoline pump and the grocery store, the Federal Reserve pays more attention to core inflation while setting policy, because it’s less volatile. Core inflation on a month-over-month basis has moderated to its slowest level since September.

“Hopefully this is as bad as it gets,” Brian Jacobsen, senior investment strategist at Allspring Global Investments, told the Associated Press. “The risk is that a red hot labor market grows cold under the force of those higher food, fuel, and financing costs. This is a time when economic resilience will be tested.”

The report comes as the Biden administration announces a push to lower gas prices by waiving environmental requirements on gasoline sold in the summer and releasing oil reserves.

Cost increases are the most pressing issue for many Americans, a CBS News poll this week found. Two-thirds of respondents said that rising prices are a hardship for their families, with about that same number reporting cutting back on travel, entertainment or driving. Cost increases have outpaced wages for 11 months, eroding workers’ real incomes.

Russia’s war in Ukraine, and the resulting sanctions from Western nations, are adding another level of uncertainty. The conflict is snarling suppliers of the world’s fossil fuels, food and precious metals.

“The war in Ukraine and economic sanctions on Russia have put global energy supplies at risk,” Brian Coulton, chief economist at Fitch Ratings, said in a note. “The jump in oil and gas prices will add to industry costs and reduce consumers’ real incomes. Outright shortages and energy rationing are possible in Europe if there is an abrupt halt to Russian supply. Higher energy prices are a given.”

Fed moves to hike rates

The surging rate of inflation has become the top concern for the U.S.’ central bank, with policymakers indicating they will move decisively to tamp down cost increases by hiking rates. 

The Federal Reserve is expected to raise its key interest rate by half a percentage point at each of its next two meetings — something it hasn’t done in two decades.

Higher interest rates slow the economy by making borrowing more expensive, and hopefully knocking down high inflation. The worry is the Federal Reserve may be so aggressive with its hikes that it forces the economy into a recession.

Higher interest rates also put downward pressure on all kinds of investments, with those seen as the most expensive hit hardest. That’s because when investors are earning more in interest to own relatively safe bonds, they’re less willing to pay higher prices for riskier stocks. Technology and other high-growth stocks that have been some of the stock market’s biggest recent winners have been in the spotlight in particular.