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A key inflation gauge is still rising, and war could make it worse


A man shops for groceries in Queens on Feb. 6, 2022. Several trends could keep prices elevated for an array of goods and services.

By Jeanna Smialek


A measure of inflation that the Federal Reserve watches closely accelerated again in January, hitting a new 40-year high and speeding up on a monthly basis as food and energy prices climbed sharply.


The Personal Consumption Expenditures index, which the Fed targets as it aims for 2% annual inflation on average over time, rose 6.1% over the past year, the fastest pace of increase since 1982. Prices climbed 0.6% in January from December, up from 0.4% the prior month.


The data, released Friday by the Commerce Department, was a fresh reminder that inflation remains stubbornly high as Russia’s invasion of Ukraine sends oil and other commodity prices higher and promises to continue to boost inflation.


The Fed has been preparing to steadily pull back its pandemic-era economic support in an effort to cool off consumer demand and tame prices. The White House is monitoring inflation closely as rising prices for food, rent and gas shake consumer confidence and dent President Joe Biden’s approval ratings before midterm elections in November.


The new inflation reading won’t surprise economists or policymakers — the Personal Consumption Expenditures number is fairly predictable because it is based on Consumer Price Index figures that come out more quickly, along with other already available data. But it reaffirms that price increases, which were expected to prove temporary as the pandemic economy reopened, have instead lasted almost an entire year and seeped into areas not affected by the coronavirus.


Rapid price increases have hit a wide array of products and services, including used cars, beef, chicken, restaurant meals and home furnishings, and several trends risk keeping inflation elevated. Notably, wages are rising rapidly, and employers are finding that they can pass their climbing labor costs along to shoppers.


Economists are also warily eyeing the conflict in Ukraine, which has already caused oil and gas prices to rise and is likely to further push up commodity costs. But some are also betting that the uncertainty it has spurred could inspire the Fed to take a more cautious approach as it tries to slow down the economy. Stock prices rose Friday as traders pared back expectations that the Federal Open Market Committee will make a large, half-percentage-point rate increase in March in an effort to decisively tamp down inflation.


“Despite the prospect of higher inflation, the Russian invasion leads us to now think the FOMC will raise rates by a more conservative” one-quarter point, Kathy Bostjancic, chief U.S. economist at Oxford Economics, wrote in research note Friday.


Researchers at Goldman Sachs estimate that an increase of $10 per barrel of oil would increase headline inflation in the United States by a fifth of a percentage point while lowering economic output by just under a tenth of a percentage point.


While it is not clear how much gas prices will shoot up — it depends on the depth of the conflict, the breadth of sanctions and Russia’s reaction — several commodity prices jerked higher in the hours after the invasion in Ukraine began.


Brent crude oil, the global benchmark, rose to more than $100 per barrel Thursday after the invasion began before moderating again Friday. There is still a risk that oil prices could climb further if Russia reacts to sanctions from the United States and Europe. Russia is a major exporter of energy to Europe.


Some economists have noted an uncomfortable precedent when it comes to a gas shock.


Rising energy prices in the 1970s helped exacerbate inflation, causing rapid price increases to become a lasting feature of the economy, one that faded only after a painful response from the Fed. The central bank pushed interest rates — and unemployment — to double digits to bring price increases to heel during what is now known as the “Great Inflation.”


That episode happened after years of quick price increases that the Fed had proved slow to tamp down. This time, the central bank is gearing up to pull back support promptly.


The Fed is expected to initiate a series of rate increases in March, policy moves that should slow down lending and spending, which could translate into weaker hiring, more subdued economic growth and more modest price gains.


“The Ukrainian situation does not alter, likely, the fundamental conclusion that it’s time to change monetary policy,” said Julia Coronado, founder of MacroPolicy Perspectives. “They’re not going to just shelve all the interest rate increases because there is a war in Ukraine.”


Christopher Waller, a Fed governor, said during a speech Thursday evening that the conflict could contribute to uncertainty but that for now, the Fed should promptly pull back its support for the economy to try to control “alarmingly” high inflation.


He suggested that if Friday’s inflation report, along with other upcoming data, “indicate that the economy is still running exceedingly hot, a strong case can be made” for raising interest rates by half a percentage point in March, twice the usual size of increase.


Fed officials appear to be poised to debate whether a bigger-than-usual increase is warranted at their meeting next month.


While the Fed officially targets headline inflation, it also keeps a careful eye on a core price measure that strips out fuel and food costs, both of which bounce around from month to month. Core inflation picked up by 5.2% in January from the prior year, the quickest pace of increase since 1983. It has posted 0.5% monthly increases for four straight months.


Annual inflation should start to slow down mechanically sometime in the coming months as prices are measured against stronger readings from last spring, when inflation first started to pick up. Fading government support is also weighing on household incomes, which could eventually help cause spending to slow somewhat.


But the moderation in price increases could prove more muted than economists and policymakers had previously expected, thanks in part to the potential for rising energy costs as the conflict in Ukraine escalates.

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