The numbers: The rate of U.S. inflation topped 8% in March for the first time in four decades and showed little sign of easing up, explaining the new-found urgency at the Federal Reserve to quickly undo its easy-money strategy.
The consumer price index jumped 1.2% in the month, driven by the higher cost of gasoline, food and housing, the government said Tuesday. It was the largest monthly gain since Hurricane Katrina in 2005.
The rise in the cost of living has been hitting new highs for months. The rate of inflation in the past year moved up to 8.5% in March from 7.9%. The last time inflation breached 8% was in January 1982, when Ronald Reagan was president.
High inflation has alarmed Americans and put the political heat on the Biden administration.
Rising prices are outstripping the fastest wage gains in four decades and surveys show inflation is the public’s biggest worry. It’s hurting Democrats at the polls ahead of the pivotal congressional elections in the fall.
The increase exceeded Wall Street’s forecast of a 1.1% advance. Both stocks and bonds were boosted after the inflation data. Stock-index futures extended gains to trade moderately higher, while Treasury yields pulled back.
The surge in inflation could begin to ebb soon, economists say, if the price of oil stabilizes and supply shortages finally begin to ease.
But it could take a few years or even longer, they say, before inflation drops back to precrisis levels of less than 2%. Some even worry that higher inflation is here to stay.
One potential sign inflation might be peaking was the smallest increase in six months in the so-called core rate of inflation that strips out food and energy. It rose just 0.3% last month.
The Fed views the core rate as a more accurate measure of inflationary trends, but most Americans still pay a large share of their budget for fuel and meals.
The increase in the so-called core rate over the past year moved up to a 40-year high of 6.5% from 6.4%.
Big picture: High inflation is showing up everywhere: At gas stations, grocery stores, big-box chains such as Best Buy BBY, +0.86% and online sellers like Amazon AMZN, -2.16%. Rents and housing prices have also surged.
The Fed is moving faster than it previously planned to jack up interest rates in an effort to tame inflation. Higher borrowing costs could slow demand for consumer goods and business supplies and help ease the upward pressure on prices.
The Fed is in a tough spot, though. If it doesn’t act fast enough, inflation could get ingrained in the economy and hurt the U.S. in the long run. Yet if it goes too aggressively, the central bank could trigger a recession.
For now most economists and investors are taking a wait-and-see approach and not banking on either scenario.
Key details: The cost of gasoline leaped 18% in March and accounted for more than half of the increase in the cost of living last month.
The average cost of a gallon of regular gas in the U.S. rose to as high as $ 4.32 in March from $ 3.61 in the prior month and $ 2.87 a year earlier. In some parts of the country prices even topped $ 7 a gallon.
The Russian invasion of Ukraine drove oil prices to a 13-year high, but the cost of fuel had already risen sharply before the war. They are expected to remain high as the summer driving season approaches.
Food prices also climbed 1% for the second month in a row — and they’re likely to keep rising. Both Ukraine and Russia are major grain exporters and the cost of fertilizer has also surged. Fertilizers are produced using fossil fuels.
Grocery prices have escalated 10% in the past 12 months — the biggest jump since 1981.
The cost of rent and housing both rose 0.4% in March and continued to march higher. These costs tend not to fall quickly barring a recession.
Over the past year the cost of shelter has climbed 5% to mark the largest increase in 40 years, putting a further strain on families. Shelter costs account for a third or more of a typical household budget.
Prices also rose last month for medical care, plane tickets, auto insurance, furniture and clothes.
The cost of used vehicles, prescription drugs and communications fell.
Used-car prices declined for the second time in a row for the first time since last summer, helping to pull down the core rate of inflation.
Inflation-adjusted wages, meanwhile, sank by 0.8% in March.
Real earnings have fallen 2.7% in the past year, signaling that workers are falling behind despite the biggest increase in wages since the early 1980s. Inflation is rising even faster.
Looking ahead: “The Russia-Ukraine war has added further fuel to the blazing rate of inflation via higher energy, food, and commodity prices that are turbo charged by a worsening in supply chain problems,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.
“If there is one silver lining from today’s report, it’s that core inflation — as opposed to the headline 8.5% annual inflation — has moderated somewhat,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, N.C.
Market reaction: In premarket trades, the Dow Jones Industrial Average DJIA, -1.19% and S&P 500 SPX, -1.69% index were set to rise in Tuesday trades. Bond yields TMUBMUSD10Y, 2.723% dipped.