By CHRISTOPHER RUGABER – AP business writer
WASHINGTON (AP) — Driven by rising costs for gas, groceries and housing, consumer inflation rose 7.9% last year, the sharpest rise since 1982 and likely just a harbinger of even higher prices.
The increase, reported Thursday by the Labor Department, reflected the 12 months that ended in February and did not include oil and gas price hikes that followed Russia’s February 24 invasion of Ukraine. Since then, average gas prices nationwide have risen by about 62 cents a gallon to $4.32, according to the AAA.
Even before the war, further accelerating price increases, robust consumer spending, solid wage increases and persistent supply constraints had pushed US inflation to its highest level in four decades. In addition, housing costs, which account for about a third of the government’s consumer price index, have risen sharply, a trend that is unlikely to reverse anytime soon.
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“The numbers are staggering, and there’s more to come,” said Eric Winograd, senior economist at wealth management firm AllianceBernstein. “The peak of inflation will be much higher than previously thought and later than previously expected.”
Thursday’s government report showed that inflation rose 0.8% in January-February, compared with a 0.6% rise in December-January. Excluding the volatile grocery and energy categories, so-called core prices rose 0.5% month-on-month and 6.4% year-on-year. Economists tend to watch core prices because they better reflect longer-lasting inflation trends.
For most Americans, inflation is far ahead of the pay rises many have received over the past year, making it harder for them to afford basic necessities like groceries, gas and rent. As a result, inflation has become the top political threat facing President Joe Biden and Congressional Democrats as the midterm elections draw closer. Small business owners indicate in surveys that this is also their primary economic concern.
In a bid to stem inflation, the Federal Reserve will raise interest rates several times this year, starting with a quarter-point hike next week. But the Fed faces a tricky challenge: If it tightens credit too aggressively this year, it risks undermining the economy and potentially triggering a recession.
From January to February almost all categories of goods and services became more expensive. Food costs rose 1.4%, the sharpest one-month increase since 1990, except during a pandemic-driven price spike two years ago. The overall price of fruits and vegetables rose 2.3%, the largest monthly increase since 2010. Gasoline prices rose 6.6%, clothing 0.7%.
In the 12 months to February, food prices rose 8.6%, the largest year-on-year increase since 1981, the government said. Gas prices are up a whopping 38%. And housing costs are up 4.7%, the largest annual jump since 1991.
Lydia Boussour, an economist at Oxford Economics, estimates that if oil prices stay at $120 a barrel for the rest of this year – which it surpassed on Tuesday before slipping – it would cost US households an average of $1,500. It would also shave about 0.8 percentage points off economic growth this year, she said. Many economists have cut their 2022 growth estimates by about half a point to around 2.5%.
Across the country, both individual Americans and businesses are grappling with the surge in inflation, trying to minimize its impact.
“Gas prices are over the roof, especially with spring break coming up for the kids,” Vikas Grover said as he filled up his car Monday in Herndon, Virginia. “It’s definitely costing our overall budget a lot, a lot more.”
In San Jose, California, Maurice Brewster, the founder of Mosaic Global Transportation, a nearly 100-vehicle limousine and transportation company, was hit by gas prices. A few months ago, Brewster was paying $4 a gallon. On Monday, the price was $6.39.
“Inflation was a killer,” he said. “I feel it every day.”
Much of Brewster’s business is moving workers from San Francisco to Silicon Valley companies like Google, Meta (formerly known as Facebook), and Merck. Gas costs are included in those contracts, and Brewster is now passing on the higher prices.
Brewster also rents limousines to consumers for weddings, wine tours and other events, and that business is booming as pandemic restrictions have eased. He plans to introduce a 10% fuel surcharge on consumer rentals and is praying his customers will pay for it.
“I assume it won’t stop them from getting out and having a good time,” he said. “I hope I’m not wrong.”
Energy prices, which had soared after Russia invaded Ukraine, rose again this week after Biden said the United States would ban oil imports from Russia. Oil prices fell Wednesday on reports that the United Arab Emirates will urge other OPEC members to boost production. But they rose again Thursday.
The Biden White House has attributed much of the inflation push to the ability of a few corporate giants to dominate industries and edge out competitors that would otherwise lower prices. The administration argues that meat prices, for example, are higher because four meatpacking companies control the industry.
In his State of the Union address last week, Biden claimed that the U.S. should manufacture more goods domestically, rather than abroad, to avoid the supply chain backups that weigh on many companies. But producing more competition or more domestic products would take time and would not bring inflation down any time soon.
Republicans in Congress and many economists say the Biden administration’s $1.9 trillion financial bailout, which distributed stimulus checks and improved unemployment benefits to tens of millions of homes after the pandemic hit, is helping by accelerating consumer spending contributed to high inflation.
The economic fallout from the war in Russia has turned a widely held assumption on its head by many economists and the Fed: That inflation would ease this spring because prices rose so sharply in March and April 2021 that year-on-year comparisons suggest a decline would show. That probably won’t happen. Should gas prices remain close to current levels, Winograd estimates that inflation could reach as high as 9% in March or April.
Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, suggested that a key question in the coming months will be whether higher gas costs will seep into the broader economy by escalating the cost of items like shipping and airline tickets. Such core price increases usually take longer to subside than volatile energy costs.
Slower growth poses a particularly difficult challenge for the Fed, as it comes at a time when higher gas prices are also fueling inflation. This pattern is similar to the “stagflation” dynamic that made the economy miserable for many Americans in the 1970s.
However, most economists believe that the US economy is growing fast enough that another recession is unlikely.
APTN photojournalist Dan Huff contributed to this report.
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