Inflation kept up its blistering pace in February, and economists say Russia’s invasion of Ukraine is triggering even steeper price increases this month.
The Labor Department reported Thursday that the Consumer Price Index, or CPI — a broad basket of goods and services — continued to rise, increasing by 0.8 percent in February, or 7.9 percent year over year, on track with economists’ expectations.
Core inflation rose by 0.5 percent for the month. The core inflation metric includes prices of goods and services from rent to airline tickets to furniture but strips out food and energy prices, which tend to be volatile even when they are not rocked by geopolitical crises.
The prospect of inflation peaking would have been a welcome balm to jittery markets, but with sweeping sanctions crimping Russia’s energy exports, experts warn that higher — possibly much higher — prices are imminent.
“There is no evidence we’re seeing real moderation. Price pressures are broad-based and intense,” said Eric Winograd, a senior economist at the asset management firm AllianceBernstein.
The worst is still to come, economists warn. As Russia’s invasion of Ukraine sends prices of oil and other commodities into the stratosphere, Wall Street and Main Street are looking ahead with trepidation. “Inflation is going to get worse before it gets better,” said Bill Adams, the chief economist for Comerica Bank.
Although they are not part of the core inflation calculation, food and energy are categories that worry economists as well as ordinary Americans. Energy prices have been rising since the beginning of the year, stoked by escalating concerns about a Russian military buildup on the Ukrainian border. Some of the rise was probably reflected in February’s CPI, but March gains that pushed oil to a 13-year high and broke gas price records will build on that.
“In February, ahead of the invasion, oil prices rose by, like, 10 percent, so some of that will show up in this data, but the vast majority will be in the months to come,” said Tendayi Kapfidze, the chief economist at U.S. Bank.
“In the near term, I’d be more concerned about energy, because those prices pass through a lot faster,” Kapfidze said. “Longer term, food is going to become more of a challenge because of the amount of food that comes from that part of the world.” While the U.S. does not do much direct agricultural trade with Ukraine or Russia, a global market exposes everyone to supply shocks.
Adams said: “Wheat futures rose sharply in the second half of February and surged in the first half of March. There will be a big effect of that on consumer prices for food over time.”
Adams said it would take time for the increases to work their way through the supply chain to store shelves. “Given how large this shock is, I would expect consumers to notice higher food prices over the next one to two months,” he said.
Some experts even predict the increases could push the CPI into double digits this year. “If energy prices stay where they are, we could see headline inflation of 10 percent year over year,” Winograd said.
But the pain will not be spread equally among U.S. households. Those who can least afford it will bear the heaviest burden.
“Unfortunately, we’re going to see the American consumer that lives paycheck to paycheck breaking much faster than the middle class and upper middle class,” said Jeffrey Roach, the chief economist for LPL Financial. “A spike in commodity prices will affect lower-income households much faster and to a much greater degree.”
And the longer Russia’s bloody invasion of its neighbor drags on, the more inflation will metastasize and creep up the income spectrum. “At this level of prices, I do expect demand destruction to set in,” Roach said.
Adams said, “I think we’re going to see a pullback in discretionary consumer spending over the next few quarters in response to this surge in commodity prices.” He added that he believes the magnitude of the price increases could affect a wider swath of Americans.
"A lot of households that were able to absorb inflation up until the beginning of this year are going to see a more meaningful hit to spending power over the next few months.”