WASHINGTON, April 14, 2022 (Xinhua) — Newly released data revealed that US inflation in March continued to rise at its fastest annual pace in four decades, which requires more aggressive rate hikes, several Federal Reserve officials indicated.
Amid ongoing supply chain bottlenecks, a tight labor market and the ongoing conflict between Russia and Ukraine, economists say high inflation in the US is unlikely to abate any time soon.
As the Federal Reserve tries to rein in high inflation by raising interest rates faster, the risk of a recession is growing.
— Months of high inflation
The Department of Labor’s Bureau of Labor Statistics reported Tuesday that the March consumer price index rose 1.2 percent from the previous month following rising by 0.8 percent in February.
The consumer price index rose 8.5 percent last month from a year earlier, the largest increase in 12 months since the period ending in December 1981. This compares with a 7.9 percent year-on-year increase in February.
The recent data is another reminder that inflation has been consistently high. Inflation started accelerating regarding a year ago due to supply chain bottlenecks and increased demand during the pandemic, with year-on-year CPI growth of more than 6 percent over the past six months.
The Labor Department’s Bureau of Labor Statistics report noted that increases in the gasoline, shelter and food indices were the “biggest contributors” to the March increase of all seasonally-adjusted items.
The gasoline index, driven by the Russian-Ukrainian conflict, rose 18.3 percent in March and accounted for more than half of all items that increased monthly. The food index rose 1.0 percent and the cost of shelter increased 0.5 percent. Compared to March of last year, the price of gasoline increased by 48 percent, while food prices increased by 8.8 percent.
Besides energy, food, and shelter, price increases are becoming widespread in other areas, as gains spread from goods to services.
“The prices of all expensive items including new cars, furniture and sporting goods have continued to rise,” Diane Sonk, chief economist at major accounting firm Grant Thornton, said in a blog post Tuesday. , whose prices are down, but still 35.3 percent higher than they were a year ago in March.
Sonk noted that airfare and car rental prices rose more than 20 percent from last year’s levels, while hotel room prices rose more than 30 percent from last year, indicating that services are enjoying a recovery.
US Federal Reserve Chairman Jerome Powell said in late March that inflation expectations had deteriorated significantly this year even before the Russia-Ukraine conflict. He said the rise in inflation was “much larger” and “more consistent” than forecasters had generally expected, noting that inflation rose “sharply” in the fall amid continuing supply disruptions linked to COVID-19 and strong demand.
Powell warned that the effects of the Ukraine crisis and Western sanctions on Russia “are likely to restrict economic activity abroad and further disrupt supply chains, which might lead to repercussions on the US economy.”
Has inflation reached its peak?
While it remains uncertain how long it will take for supply chain bottlenecks to subside, some experts believe there are signs that rising inflation in the US may begin to subside soon.
The March CPI reading “represents what many economists expect to be the peak of the current inflation period,” as it was overshadowed by the impact of higher food and energy prices in the wake of the Russia-Ukrainian conflict, according to a Bloomberg report.
The price hike may start to subside in the coming months partly because gasoline prices, which are up more than 40 percent from last year, have already fallen slightly in recent weeks. The national average gallon of regular gasoline in the United States was $4,098 on Tuesday, down 5.3 percent from the previous month, the American Automobile Association said.
The core CPI, which excludes food and energy, rose 0.3 percent in March following rising 0.5 percent the previous month. The core CPI jumped 6.5 percent over the past 12 months, following rising 6.4 percent in February.
“Below the surface are indications that pandemic-related inflation is beginning to subside,” Sarah House and Michael Pugliese, economists at Wells Fargo Securities, said in an analysis, with commodity inflation seeing a monthly decline of 0.4 percent, the largest drop since April 2020.
Despite this, the two economists believe inflation is still “a long way off” from returning to the Fed’s 2 per cent target. “We expect the core CPI to remain at 6 percent year-over-year in the fourth quarter, with the quarterly annual rate continuing to rise uncomfortably at around 4 percent,” they said.
– The Fed is more hawkish
Analysts say that persistently high inflation may lead to a contraction in consumer demand, prompting consumers to reduce spending, or increase upward pressure on wages, which may lead to higher inflation, neither of which is considered a positive outcome.
In mid-March, the Federal Reserve raised its benchmark interest rate by a quarter of a percentage point to a range of between 0.25 per cent and 0.5 per cent from nearly zero. It was the first rate hike since 2018 and a major step out of the ultra-loose monetary policy enacted at the start of the pandemic.
Since the March policy meeting, a series of comments from Federal Reserve officials have indicated that the urgency of raising interest rates is increasing, and that the central bank is ready to take tougher action going forward.
Powell said in late March that the central bank would, if necessary, move “more aggressively” to raise the federal funds rate by more than 25 basis points at its policy meetings to curb inflation. Several Fed officials later said they were open to a 50 basis point rate hike.
According to the minutes of the Fed’s March policy meeting released last week, several participants indicated that one or more 50 basis points increase in the target range might be “appropriate” at future meetings, especially if inflation pressures remain elevated or intensified.
The minutes also revealed that the Federal Reserve may begin reducing the size of its balance sheet as soon as possible in May, with officials indicating their support for a monthly ceiling of $95 billion, a much faster pace of decline in securities holdings compared to 2017-2019.
According to the Chicago Exchange Group’s FedWatch tool, the probability of a 50 basis point rate cut at the Fed’s next policy meeting was more than 85 percent on Tuesday, compared to regarding 42 percent a month ago.
Economists from Wells Fargo Securities expect the Federal Reserve to speed up tightening and raise the federal funds rate by 50 basis points at both the May and June meetings. “We expect monetary policy to become restrictive by early next year, which will help curb inflation further by 2023,” they said.
Noting that the Fed is “lapping the curve”, Sonk said inflation will likely remain very high through 2023. Fed officials want to bring interest rates back above 2 percent by the end of the year and 3 percent in early 2023. “Get ready. There’s a shiver coming on the interest rate front,” she added.
The growing risk of recession
Historically, it has been difficult for the Federal Reserve to achieve a soft landing by tightening monetary policy aggressively when inflation is high and unemployment is low.
Even Powell, who argued that soft landings, or soft landings, had been relatively common in US monetary history, noted that “no one expects a soft landing to be a smooth thing in the present context”.
“It is often said that monetary policy is a sharp tool, and is not capable of achieving surgical precision,” the Federal Reserve Chairman stated, adding, “My colleagues and I will do everything in our power to succeed in this difficult task.”
A Wall Street Journal poll showed that economists, on average, estimated the probability of the economy sliding into recession sometime in the next 12 months at 28 percent, up from 18 percent in January and just 13 percent a year ago.
As former US Treasury Secretary Lawrence Summers noted in a recent NBC interview, in past decades, when inflation was above 4 percent and unemployment was below 4 percent, the US economy typically slipped into recession in In two years, the Fed’s job will be very difficult.
