High inflation is a downside of rapid growth as the economy bounces back from the Covid-19 pandemic, creating a difficult balancing act for the Fed as it tightens monetary policy to reduce price gains without spurring growth .
“We are seeing strong inflation momentum across the board for both goods and services,” Blarina Urusi, US economist at T. Rowe Price Group Inc., said ahead of the report. Ms Urusi said supply-chain barriers continue to push up prices, except for a reduction in the cost of older cars.
“To me, this is a red flag,” said Ms. Urusi. “The second red flag is Russia’s invasion of Ukraine and the rise of COVID in China. They run the risk that the so-called normalization of the supply chain takes longer to materialise.”
Consistently higher prices come as the overall economy strengthens and the labor market is tight. Employers added 431,000 jobs in March, with gains of more than 400,000 for the 11th month in a row—the longest such stretch since records began in 1939.
High and rising inflation readings have put pressure on the Fed to reduce interest rates this year to ease price pressure. The central bank raised its benchmark rate in March for the first time since 2018.
With job growth and inflation well above the Fed’s target, several Fed officials have indicated that they may support raising half a percentage point instead of the traditional quarterly point at their next meeting in early May.
Energy prices rose in early March as Russia’s invasion of Ukraine pushed up crude oil prices. Although petrol prices have fallen slightly in recent weeks, they are close to record highs.
Food inflation is also pushing up the grocery bills of consumers due to the steady rise in prices of meat, eggs and citrus fruits. The Ukraine crisis is likely to put further pressure in the coming months due to disruptions in global wheat and fertilizer production.
Richard F. Moody, chief economist at Regions Financial Corp., said the burden of price increases could trigger a consumer pullback. Consumer spending declined in February, rising 0.2% from January, though it has remained strong at 13.7 percent from the same month. 2021.
“There is an element of sticker shock when people go to fill their tank or go to the grocery store. Low- and middle-income households are already having to make choices about what to buy because they are paying a lot for food and energy,” Mr. Moody said.
Alex Salwicz, 40, is facing the rising costs of raising his five children. “The thing about having a big family is that each incremental increase multiplies,” he said.
He said he’s tried substituting generic food products for name-brand foods as prices have risen—not always successfully. His kids, ages 3 to 12, recently backtracked when he put a bag of off-brand marshmallow cereal into a Lucky Charms box. “It didn’t pass,” said Mr. Salwicz, a program manager for information technology who lives in the Denver suburbs. “They rebelled a little, and more than one of them told me I shouldn’t do that again.”
Inflation has destroyed their standard of living in other ways, Mr Salwicz said. The children grumble when the family crammed uncomfortably into two small vans to save gas. They have substituted fast-food meals for a sit-down dining experience once a month. He and his wife, Amber Salwicz, are considering canceling summer camp plans due to the sharp rise in prices. A partial day camp this summer raised its price to $800 a week, up from $500 earlier.
A reduction in Covid-19 cases is also driving price gains as demand for travel, food and other services surges, and could gain momentum as summer vacations lead to more recreational spending. The steady rise in housing cost, which accounts for about one-third of the CPI, is also adding to inflationary pressures.
Solid demand for labor has shifted bargaining power towards workers, exerting upward pressure on wages, allowing wide price gains. Annual wage growth was 6% in March, according to the Federal Reserve Bank of Atlanta’s wage tracker, the fastest pace since records began in 1997.
Still, wages are rising too slowly for most to compensate for inflation. This can prompt workers to demand higher wages, creating a feedback loop that puts upward pressure on inflation.
An indicator of building up inflationary pressures eased in March. Consumers’ average inflation expectation for three years from now fell to 3.7% last month, from 3.8% in February, according to a survey released Monday by the New York Fed. However, a year from now the average inflation expectation rose to 6.6% from 6% in February.
Ron Meyland, an aerial photographer in Cedar Rapids, Iowa, has experienced a triple-whammy of high costs from energy, supply-chain disruption, and labor.
“If you think filling a car is expensive, try an airplane,” he said, adding that he pours hundreds of dollars’ worth of fuel into the tank every day. When he needed to buy small parts to repair one of his plane’s oil-pressure systems, it took him two or three days to find the materials and they cost twice as much as he expected.
“I still get sticker shock when pulling up to the pump, and then to parts and repairs — that’s where it’s really killing me,” he said. “It looks like the numbers are just getting bigger.”