Inflation accelerated to a new four-decade high in March as supply chain constraints, the Russian war in Ukraine and strong consumer demand fueled rapid price gains that wiped out the benefits of rising wages for most Americans.
The Labor Department said Tuesday that the consumer price index – which measures a bevy of goods including gasoline, health care, groceries and rents – rose 8.5% in March from a year ago, the fastest pace since December 1981, when inflation hit 8.9%. Prices jumped 1.2% in the one-month period from February, the largest month-to-month jump since 2005.
Economists expected the index to show that prices surged 8.4% in March from the previous year and 1.2% on a monthly basis.
So-called core prices, which exclude more volatile measurements of food and energy, climbed 6.5% in March from the previous year – up from the 6.4% increase recorded in February. It was the steepest 12-month increase since August 1982.
Price increases were widespread: Energy prices rose a stunning 11% in March from the previous month, and are up 32% from last year. Gasoline, on average, costs 48% more than it did last year after rising 18.3% in March on a monthly basis as the Russian war in Ukraine fueled a rapid increase in oil prices.
The March inflation data is the first to capture the full effect of the European war, which sent gas prices in the U.S. to the highest since 2008.
Food prices have also climbed 8.8% higher over the year and 1% over the month, with the largest increases in cereal and bakery products (10%), poultry, fish and meat (13.8%), fresh fruits and vegetables (8.1%), and eggs (11.2%).
Used car and truck prices, which have been a major component of the inflation increase, are still up 35.3% from the previous year, but actually declined by 1.8% in the one-month period between February and March. Shelter costs are up 5% year over year and jumped 0.6% for the month.
The inflation spike has been bad news for President Biden, who has seen his approval rating tumble as consumer prices rise. The White House has blamed the price spike on supply-chain bottlenecks and other pandemic-induced disruptions in the economy, while Republicans have pinned it on the president's massive spending agenda and his energy policies targeting the oil and gas industries.
Rising inflation is eating away at strong wage gains that American workers have seen in recent months: Real average hourly earnings decreased 0.8% in March from the previous month, as the 1.2% inflation increase eroded the 0.4% total wage gain, according to the Labor Department. On an annual basis, real earnings fell 2.7% in March.
The data will also have major implications for the Federal Reserve, which has taken a more hawkish approach to fight inflation in recent months: Policymakers raised rates by a 0.25 percentage point in March, and have since signaled support for a faster, half-point increase at their May meeting.
"Many participants noted that one or more [0.5-point] increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified," the Fed minutes from its March meeting said.
The biggest question now is whether central bank officials can successfully tame inflation and stabilize prices without triggering an economic recession. Raising the federal funds rate tends to create higher rates on consumers and business loans, which slows the economy by forcing them to cut back on spending.
Chairman Jerome Powell has pushed back against concerns that further tightening by the central bank will trigger a recession and has maintained optimism that the Fed can strike a delicate balance between taming inflation without crushing the economy.
"The probability of a recession in the next year is not particularly elevated," Powell told reporters during the Fed's March meeting, citing the strong labor market, solid payroll growth and strong business and household balance sheets. "All signs are that this is a strong economy and one that will be able to flourish in the face of less accommodative monetary policy."