Gasoline drives inflation, with consumer prices up 8.5%

WASHINGTON — U.S. monthly consumer prices increased by the most in 16½ years in March as Russia’s war against Ukraine boosted the cost of gasoline to record highs, cementing the case for a 50 basis points interest rate hike from the Federal Reserve next month.

The surge in prices reported by the Labor Department on Tuesday culminated in annual inflation rising at its fastest pace since the end of 1981. But there were some glimmers of hope, with monthly underlying price pressures rising moderately as motor vehicle prices cooled. Economists also believe overall inflation has peaked.

“The Fed will take a tiny bit of comfort from today’s report, but it still has much work to do to restore price stability,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

The consumer price index accelerated 1.2% last month, the biggest monthly gain since September 2005. The CPI advanced 0.8% in February. An 18.3% surge in gasoline prices accounted for more than half the increase in the CPI.

Gasoline prices for a gallon of regular at the pump on average soared to an all-time high of $4.33 per gallon in March, according to AAA. As of Tuesday, the average price had fallen to $4.09.

Russia is the world’s second-largest crude oil exporter. The United States has banned imports of Russian oil, liquefied natural gas and coal as part of a range of sanctions against Moscow for its invasion of Ukraine.

In addition to pushing up gasoline prices, the Russia-Ukraine war, now in its second month, has led to a global surge in food prices as Russia and Ukraine also are major exporters of commodities like wheat and sunflower oil.

Outside gasoline, the increase in inflation was across the board. Food prices increased 1.0%, with the cost of food consumed at home soaring 1.5% amid strong gains across all categories. But the cost of food consumed away from home moderated as a 0.7% rise in full service meals was partially offset by a 0.2% drop in limited service meals, the first decrease since October 2018.

In the 12 months through March, the CPI accelerated 8.5%. That was the largest year-on-year gain since December 1981 and followed a 7.9% jump in February. It was the sixth straight month of annual CPI readings north of 6%.

Last month’s increase in inflation was in line with economists’ expectations.

The strong CPI readings followed on the heels of news last month that the unemployment rate fell to a new two-year low of 3.6% in March. The tight labor market is fueling wage inflation.

The U.S. central bank in March raised its policy interest rate by 25 basis points, the first hike in more than three years. Minutes of the policy meeting published last Wednesday appeared to set the stage for big rate increases down the road.

High inflation and the Fed’s hawkish posture have left the bond market fearing a U.S. recession, though most economists expect the expansion will continue.

U.S. stocks opened higher. The dollar was steady against a basket of currencies. U.S. Treasury yields fell.

Monthly core CPI slows

Economists believe March could mark the peak in the annual CPI rate, but caution that inflation would remain well above the Fed’s 2% target at least through 2023.

Gasoline prices have retreated from record highs, but still remain above $4 per gallon. Last year’s high inflation readings will also start falling from the CPI calculation.

“March may prove to be the peak for year-over-year inflation measures for this cycle,” said Ben Ayers, senior economist at Nationwide in Columbus, Ohio. “Still, given the high starting point and the likelihood of further delays to the healing of supply chains, inflation readings should remain highly elevated through 2022 and into 2023.”

A second straight monthly decline in prices of used cars and trucks resulted in a tame monthly reading for underlying inflation. New motor vehicle prices also moderated. Excluding the volatile food and energy components, the CPI rose 0.3% after gaining 0.5% in February.

A 0.5% increase in shelter costs accounted for nearly two-thirds of the rise in the so-called core CPI. A key measure of rents, owners’ equivalent rent of primary residence, advanced 0.4%. The cost of hotel and motel accommodation also increased strongly.

Airline fares soared 10.7%. Household furnishings also cost more and did motor vehicle insurance, apparel, recreation and personal care. The cost of healthcare rose 0.5%, with both doctor visits and hospital services increasing solidly. But prescription medication prices fell 0.2%.

The core CPI climbed 6.5% in the 12 months through March, the largest rise since August 1982, after increasing 6.4% in February.

Lockdowns in China to contain a resurgence in COVID-19 infections are seen putting more strain on global supply chains, which could keep goods prices elevated. Separately, rising rents for housing are also expected to keep core inflation hot.