Rising Inflation, Rising Prices

Since the start of 2021, there has been only one month when the Consumer Price Index rose less than the consensus forecast, according to Bespoke Investment Group. February did not depart from the trend.

The Consumer Price Index (CPI) rose 0.8% in February, according to the U.S. Bureau of Labor Statistics, topping expectations of 0.7%. The core CPI, which strips out food and energy, rose 0.5%, matching expectations.

The CPI is up 7.9% versus one year ago, and the core CPI is up 6.4%.

Energy led the way, rising 3.5% in just one month. Notably, used car prices slipped 0.2%. Early last year, used car prices were driving inflation higher. While prices are still high, inflation has broadened. It’s far more than just autos and a few items tied to the reopening of the economy.

For example, services, which wouldn’t be affected by supply chain woes because they aren’t manufactured, rose 0.5% last month. It’s an annualized pace of over 6%.

Unfortunately, inflation seems set to get much worse, at least over the short term. The average price of a gallon of gasoline is up almost 90 cents in a month, though March 11 per GasBuddy. In addition, wheat prices, which are an important Ukraine export, have jumped.

For every penny increase in the price of gas, U.S. consumer spending drops by $1.18 billion a year, according to the estimate from Federated Global Investment Management (Bloomberg).

For example, a $1 jump in gasoline, if maintained, would hit spending by roughly $118 billion. But U.S. Gross Domestic Product is over $24 trillion, which would translate to about 0.5%. It’s not insignificant, but by itself, it’s not enough to throw the economy into a recession.

According to Bloomberg, U.S. energy spending today as a percent of consumer spending is about half what it was in the early 1980s. It doesn’t take away the shock at the pump, but it offers a long-term perspective.

Nonetheless, the psychological shock of soaring gasoline prices bears watching. It can affect lower-earning, less-skilled workers more, as they spend a disproportionately higher share of their income on gasoline.