U.S. inflation surges 8.5 pct in March, warrants Fed's aggressive rate hikes

WASHINGTON, April 12 (Xinhua) -- Newly released data showed that U.S. inflation in March continued to rise at the fastest annual pace in four decades, warranting more aggressive interest rate hikes, as signaled by several Federal Reserve officials.

Amid persistent supply chain bottlenecks, a tight job market and the ongoing Russia-Ukraine conflict, economists say high inflation in the United States is unlikely to fade anytime soon.

As the Fed tries to rein in surging inflation with faster rate hikes, the risk of an economic recession is growing.

MONTHS OF ELEVATED INFLATION

The consumer price index (CPI) in March rose 1.2 percent from the previous month after increasing 0.8 percent in February, the Labor Department's Bureau of Labor Statistics (BLS) reported Tuesday.

The CPI surged 8.5 percent last month from a year earlier, the largest 12-month increase since the period ending December 1981. That compared with a 7.9 percent year-on-year gain in February.

The latest data is another reminder that inflation has been persistently high. Inflation started to accelerate about a year ago due to supply chain bottlenecks and growing demand in the pandemic, with the year-on-year CPI growing by over 6 percent for the past six months.

The BLS report noted that increases in the indexes for gasoline, shelter, and food were the "largest contributors" to the seasonally adjusted all items increase in March.

The gasoline index, driven by the Russia-Ukraine conflict, rose 18.3 percent in March and accounted for over half of the all items monthly increase. The food index rose 1.0 percent and shelter cost increased 0.5 percent. Compared with March last year, gasoline price surged 48 percent, while food price soared 8.8 percent.

Beyond energy, food and shelter, price increases have become broad-based in other areas, with gains spreading from goods into services.

"Big-ticket items including new vehicles, furniture and sporting goods all continued to surge in price," Diane Swonk, chief economist at major accounting firm Grant Thornton, said in a blog Tuesday, noting that the only major exception was used vehicles, which fell in price, but were still 35.3 percent higher than a year ago in March.

Airfares and rental cars were up more than 20 percent from year ago levels, while hotel rooms rates were up more than 30 percent from a year ago, indicating services are enjoying a rebound, Swonk noted.

U.S. Federal Reserve Chairman Jerome Powell said late March that the inflation outlook had deteriorated significantly this year even before the Russia-Ukraine conflict. The rise in inflation, he said, has been "much greater" and "more persistent" than forecasters generally expected, noting that inflation moved up "sharply" in the fall amid continued COVID-related supply disruptions and strong demand.

Powell warned that the effects of the Ukraine crisis and the Western sanctions on Russia are "likely to restrain economic activity abroad and further disrupt supply chains, which would create spillovers to the U.S. economy."

HAS INFLATION PEAKED?

While it's still uncertain how long it will take for supply chain bottlenecks to ease, some experts believe that there are signs that surging U.S. inflation could begin abating soon.

The March CPI reading "represents what many economists expect to be the peak of the current inflationary period," capturing the impact of soaring food and energy prices in wake of the Russia-Ukraine conflict, according to a Bloomberg report.

Price hikes could begin subsiding in the coming months partly because gasoline prices, which surged over 40 percent from a year ago, have already declined slightly in recent weeks. The U.S. national average for a gallon of regular gasoline recorded 4.098 U.S. dollars on Tuesday, 5.3 percent lower than a month ago, according to the American Automobile Association (AAA).

The so-called core CPI, which excludes food and energy, rose 0.3 percent in March following a 0.5-percent growth in the prior month. Core CPI jumped 6.5 percent over the last 12 months, after climbing 6.4 percent in February.

Sarah House and Michael Pugliese, economists at Wells Fargo Securities, said in an analysis that "underneath the surface there are signs that pandemic-related inflation is beginning to ease," as core goods inflation saw a monthly decline of 0.4 percent, the biggest drop since April 2020.

Despite that, the two economists believe that inflation remains "a long way off" from returning to the Fed's 2-percent target. "We expect headline CPI to still be around 6 percent on a year ago basis in the fourth quarter, with the quarterly annualized rate still uncomfortably high at around 4 percent," they said.

FED TO BE AGGRESSIVE

Analysts say persistently high inflation could lead to a contraction in consumer demand, prompting consumers to cut back on spending, or add to upward pressure on wages, which could push inflation higher, neither of which is a favorable outcome.

In mid-March, the Fed raised its benchmark interest rate by a quarter percentage point to a range of 0.25 percent to 0.5 percent from near zero. This marked its first rate hike since 2018 and a major step in exiting from the ultra-loose monetary policy enacted at the start of the pandemic.

Since the March policy meeting, a flurry of comments from Fed officials indicated that the urgency for rate hikes is growing, and the central bank is prepared to take more aggressive actions going forward.

Powell said in late March that the central bank will, if needed, move "more aggressively" to raise federal funds rate by more than 25 basis points at its policy meetings to curb inflation. Several Fed officials subsequently said they were open to raising rates as much as 50 basis points.

According to the minutes of the Fed's March policy meeting released last week, many participants noted that one or more 50 basis point increases in the target range could be "appropriate" at future meetings, particularly if inflation pressures remained elevated or intensified.

The minutes also showed that the Fed could begin reducing the size of its balance sheet as soon as May, with officials signaling their support for a monthly caps of 95 billion U.S. dollars, a much faster pace of decline in securities holdings than over the 2017-19 period.

According to the Chicago Mercantile Exchange Group's FedWatch tool, the probability of a 50-basis-point rate cut at Fed's next policy meeting was over 85 percent on Tuesday, compared with roughly 42 percent a month ago.

The economists from Wells Fargo Securities expect the Fed to expedite tightening and hike the fed funds rate by 50 basis points at both the May and June meetings. "We expect monetary policy to become restrictive by early next year, which should help further quell inflation come 2023," they said.

Noting that the Fed is "behind the curve," Swonk said inflation will likely remain too hot well into 2023. Fed officials would like to get rates back above the 2 percent level by year-end and 3 percent in early 2023. "Bundle up. A chill is coming on the rate front," she said.

RECESSION RISK GROWS

Historically, it has been difficult for the Fed to achieve a soft landing by aggressively tightening monetary policy when inflation is high and unemployment is low.

Even Powell, who argued that soft, or at least softish landings have been relatively common in U.S. monetary history, noted that "no one expects that bringing about a soft landing will be straightforward in the current context."

"Monetary policy is often said to be a blunt instrument, not capable of surgical precision," said the Fed chair. "My colleagues and I will do our very best to succeed in this challenging task."

A newly released survey by The Wall Street Journal showed that economists on average put the probability of the economy plunging in recession sometime in the next 12 months at 28 percent, up from 18 percent in January and just 13 percent a year ago.

In a recent interview with NBC, former U.S. Treasury Secretary Lawrence Summers also pointed out that in the past decades, when inflation was above 4 percent and unemployment was below 4 percent, the U.S. economy usually fell into recession within two years, which means the Fed's task would be very difficult.