Higher food costs, rising rents, and soaring energy prices are likely to propel consumer price inflation to its highest level since December 1981 in March.
According to Dow Jones, the consumer price index will be revealed Tuesday at 8:30 a.m. ET, with experts expecting a monthly increase of 1.1 per cent and an increase of 8.4 per cent year over year. This compared to a 0.8 percent growth in February, or 7.9 pe rcent year over year, which was the largest since early 1982.
“It’s going to be ugly,” said Mark Zandi, chief economist at Moody’s Analytics. “It’s a perfect storm — Russian invasion, surging oil prices, China locking down, further disruptions to supply chains, wage growth accelerating, unfilled positions. Just a kind of scrambled mess leading to painfully high inflation. We’re struggling through two massive global supply shocks. It would be hard to imagine we didn’t suffer higher inflation.”
According to Dow Jones, core inflation, which excludes food and energy, is predicted to grow half a per cent — the same as February — with a year-over-year gain of 6.6 per cent, up from 6.4 per cent.
“The good news is it does look like it will be the peak because of oil prices,” said Diane Swonk, chief economist at Grant Thornton. Oil prices surged shortly after Russia invaded Ukraine in late February, reaching a high for West Texas Intermediate oil futures of $130.50 per barrel in early March. That price has fallen to about $94 per barrel Monday.
According to AAA, gasoline prices increased as well, reaching a national average of $4.33 per gallon of unleaded on March 11. On Monday, the price was $4.11 a gallon.
“The problem for the Fed is the broadening of inflation from goods into services and also because used car prices might be picking up again,” said Swonk. “The supply chain issues aren’t going away. They’re getting worse.”
On the basis of base effects, experts believe that inflation will peak this month or next month. According to Zandi, the headline CPI will drop to 4.9 per cent by the end of the year.
The Federal Reserve is likely to tighten policy aggressively in order to cool the country’s fastest-growing inflation rate in four decades. Markets are anticipating a half-point raise in May, and economists believe a strong inflation report in June will also result in a half-point hike.
“The Fed’s on track. It’s at least a half-per cent hike, and the balance sheet reductions starting out,” he said.
After reducing the fed funds target rate to zero in early 2020, the Fed hiked interest rates by a quarter point in March.
The Fed is expected to hike rates by 50 basis points at its May 3 meeting, according to Tom Simons, money market analyst at Jefferies, and the CPI should not change that. “If it comes in significantly higher than projected, which I doubt,” he said, “there will be talk of a 75-basis-point hike or an intermeeting hike.” “That, in my opinion, is just rubbish.” A basis point is equal to 0.001 per cent of a percentage.
According to Simons, energy prices in the CPI are likely to rise 18% in March.
“That first half of March was particularly acute post-Russian invasion. Food prices are a similar story but not nearly to the same extent. … Housing again is going to be a pretty significant factor,” he said.
He anticipates a 0.5 per cent increase in owners’ equivalent rent, or the cost of a home in CPI, while rents will rise 0.6 percent month over month. One area where costs are projected to rise is housing. Shelter, which accounts for a third of the CPI, would be up 4.6 per cent year over year.
Shelter costs have risen at their fastest rate since early 1990, according to Swonk, and they may continue to grow.
“I think there’s a risk it comes in on the hot side,” she said.
(Adapted from CNBC.com)