The government said on Tuesday that inflation in March was bad, real bad. But you knew that.
The electric bill, the rent check, the $1 avocados that are now $1.35: Everywhere you look, consumer prices have been climbing faster than you’ve ever seen.
Well, that’s not exactly true, if you can remember back to December 1981, when Ronald Reagan was wrapping up his first year in the White House. Inflation was higher then, but it was on its way down from even scarier levels. The retreat came after Paul Volcker, the legendary Federal Reserve chairman, jacked up interest rates to 20 percent, triggering the first round of a double-dip recession.
While such Draconian action won’t be needed this time, inflation is our biggest economic threat and will remain so for some time. There are glimmers of hope, however, that the surge in prices has peaked.
The price of gas at the pump, which accounted for more than half of last month’s increase, has backed off a bit in recent weeks; product supply constraints seem to be loosening; and investors’ inflation expectations — a key measure of sentiment down the road — haven’t risen all that much.
Still, inflation is the ultimate pocketbook issue, and Americans tell pollsters they are concerned about their eroding purchasing power. Yes, wages are up, but not enough to offset inflation.
That’s fueling dissatisfaction with President Biden’s handling of the economy as the midterm elections approach — even though on other fronts, especially jobs, the economy is strong. So strong, in fact, that the Federal Reserve has to hike interest rates faster, and probably farther, than it planned to just a few months ago.
Here’s what the US Bureau of Labor Statistics says about last month:
The Consumer Price Index rose 8.5 percent from a year earlier, with painful increases in energy, housing costs, and groceries.
Excluding food and energy, which jump around a lot, the so-called core inflation rate was 6.5 percent. A year ago a price spike like that would have been unthinkable.
When comparing prices with February’s, the CPI was up 1.2 percent last month, the most since 2005 and nearly the same as the gain for all of 2020.
One hopeful sign: the pace of core inflation slowed from February.
By now you’ve heard all the reasons why prices are on a tear.
First, COVID-19 gnarled supply lines, making a range of goods, from sofas to fencing to cars, hard to get. Then came stimulus checks, expanded unemployment payments, and COVID relief funds for states and cities — free government money that drove spending.
As we’ve returned to more normal routines, demand for goods and services is outstripping supply. For example, air fares were up 11 percent in March over February as we engage in “revenge travel” after months of staying close to home. And buyers are still bidding up housing prices, which have soared 23 percent in the past year based on the CPI.
Russia’s attack on Ukraine in late February only made a bad situation worse. Russia supplies about 10 percent of the world’s oil, and fears of disruptions have added about $25 a barrel to the price of crude since the start of the year. Russia and Ukraine combined produce a lot of wheat, and the war has led to much higher food costs.
At the same time, China, which has a zero-COVID policy, has locked down Shanghai, a major global business hub that has experienced an outbreak of infections, which could impact the supply chain.
Economists and the Federal Reserve were slow to concede that their inflation forecasts underestimated just how high prices would go and how long the gains would remain elevated.
The Fed’s preferred gauge of inflation, called core PCE, rose 5.4 percent in February over the prior year, more than double the central bank’s longer-term target of 2 percent.
Now the Fed has to play catch up.
That means raising interest rates to slow demand, which in turn will likely push the jobless rate, now at 3.6 percent, higher.
The Fed is expected to boost its benchmark federal funds rate by a half percentage point at the end of its next meeting, on May 4. The Fed hasn’t lifted rates by a half-point in 20 years.
That increase would follow at quarter-point nudge in March. In its latest projections, the Fed said the fed funds rate would rise to 2.8 percent by the end of next year. Some economists believe rates will have to reach as much as 5 percent to wrestle inflation back to the Fed’s target.
Rates haven’t been that high since 2007.
The danger is that the Fed overshoots, triggering a recession.
But what about those glimmers of hope, you ask? The average price of regular gas in Massachusetts is $4.01 a gallon, according to AAA. That’s down 35 cents from a month ago.
“It would be reasonable to presume that we are peaking in terms of energy,” said Brian Bethune, an economist at Boston College. New supplies of oil are coming onto the market, he said, but “the issue is that it won’t be a smooth process.”
Paul Krugman, the Nobel prize-winning economist and New York Times op-ed columnist, notes that car lots are filling up and shipping rates are falling.
“If you think today’s report showed inflation spiraling out of control, you’re wrong. In fact, we’re probably about to get some misleadingly good news on that front,” Krugman wrote on Tuesday.
Don’t start celebrating just yet.
There is a big difference between getting past inflation’s peak and getting inflation under control.
The worst might be behind us, but the pain will linger, most likely into next year.