Households Squeezed As U.S. Consumer Prices Accelerate; More Pain Coming

U.S. consumer prices surged in February, forcing Americans to dig deeper to pay for rent, food and gasoline, and inflation is poised to accelerate even further as Russia's war against Ukraine drives up the costs of crude oil and other commodities.

The broad rise in prices reported by the Labor Department on Thursday led to the largest annual increase in inflation in 40 years. Inflation was already haunting the economy before Russia's invasion of Ukraine on Feb. 24, and could further erode President Joe Biden's popularity.

The Federal Reserve is expected to start raising interest rates next Wednesday. With inflation nearly four times the U.S. central bank's 2% target, economists are expecting as many as seven rate hikes this year.

Lower-income households bear the brunt of high inflation as they spend more of their income on food and gasoline.

"Consumers' shock at rapidly rising gas prices at the pump will continue to put pressure on the Fed and policymakers to do something, anything, to slow down the speed at which prices everywhere are moving higher," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina.

The consumer price index increased 0.8% last month after gaining 0.6% in January. A 6.6% rebound in gasoline prices accounted for almost a third of the increase in the CPI. Gasoline prices had declined 0.8% in January. Food prices jumped 1.0%, with the cost of food consumed at home soaring 1.4%.

Prices for fruit and vegetables increased by the most since March 2010, while the rise in the cost of dairy and related products was the largest in nearly 11 years.

In the 12 months through February, the CPI shot up 7.9%, the biggest year-on-year increase since January 1982. That followed a 7.5% jump in January and was the fifth straight month of annual CPI readings north of 6%. February's increase in the CPI was in line with economists' expectations.

Last month's CPI data does not fully capture the spike in oil prices following the outbreak of the war in Ukraine. Prices shot up more than 30%, with global benchmark Brent hitting a 2008 high at $139 a barrel, before retreating to trade around $112 a barrel on Thursday.

The United States and its allies have imposed harsh sanctions on Moscow, with Biden on Tuesday banning imports of Russian oil into the United States. Russia is the world's second-largest crude oil exporter.

U.S. gasoline prices are averaging a record $4.318 per gallon compared with $3.469 a month ago, AAA data showed.

Biden on Thursday acknowledged the hardships Americans were facing from sky-rocketing prices, but blamed Russian President Vladimir Putin's actions.

"As I have said from the start, there will be costs at home as we impose crippling sanctions in response to Putin's unprovoked war, but Americans can know this, the costs we are imposing on Putin and his cronies are far more devastating than the costs we are facing," Biden said in a statement.

Soaring inflation is wiping out wage gains. Inflation adjusted average hourly earnings fell 2.6% on a year-on-year basis in February, the Labor Department said. Moody's Analytics estimates that inflation at February levels was costing the average household $296.45 per month, up from $276 in January.

Economists expect the annual CPI rate will peak above 8% in March or April and start to slow in the following months as the high readings from last spring drop out of the calculation.

Stocks on Wall Street were lower. The dollar gained versus a basket of currencies. U.S. Treasury yields rose.

SOARING RENT COSTS

Inflation was ignited by a shift in spending to goods from services during the COVID-19 pandemic and trillions of dollars in relief from the government. The resulting surge in demand ran against capacity constraints as the spread of the coronavirus pushed millions of workers out of the labor market, making it harder to move raw materials to factories and finished goods to consumers.

Excluding the volatile food and energy components, the CPI increased 0.5% last month after advancing 0.6% in January.

A 0.5% rise in the cost of shelter like rental accommodation as well as hotel and motel rooms accounted for more than 40% of the increase in the so-called core CPI. The cost of rent jumped 0.6%, the most since March 2005. Rental costs are sticky and will keep core CPI hot.

"Due to the way rents are sampled in the CPI, resampling every six months, the index tends to lag other indicators such as the Zillow Observed Rent Index, suggesting CPI rents will likely continue to rise strongly for a while yet," said Daniel Vernazza, chief international economist at UniCredit in London.

Consumers paid more for household furnishings and operations, motor vehicle insurance as well as clothing and personal care. Airline fares soared 5.2% as sharply declining coronavirus infections boosted demand for travel.

But prices of new motor vehicles rose modestly while used cars and trucks fell, suggesting some easing in pent-up demand. Motor vehicles were one of the main drivers of inflation because of a global semiconductor shortage.

In the 12 months through February, the core CPI vaulted 6.4%, the largest year-on-year gain since August 1982, after increasing 6.0% in January.

Despite high inflation, tighter monetary policy and the conflict in Ukraine, a recession is not expected. Demand for labor is strong, with a near record 11.3 million job openings at the end of January. Households are sitting on about $2.6 trillion in excess savings.

"The cost to consumers is high," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "However, there are also reasons to be optimistic that consumers can weather a temporary spike in gasoline prices, as household balance sheets in aggregate are in great shape. Gasoline spending as a share of total nominal consumption is low."

Though a separate report from the Labor Department showed initial claims for state unemployment benefits increased 11,000 to a seasonally adjusted 227,000 for the week ended March 5, they remained at levels consistent with a tight labor market.