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A Key Inflation Gauge Is Still Rising, and the War Could Make It Worse

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A Key Inflation Gauge Is Still Rising, and the War Could Make It Worse

imageThe war in Ukraine could drive up gas prices at stations like these in Brooklyn.
Credit…Amir Hamza for The New York Times

A measure of inflation that the Federal Reserve sees sharply again in January reached a new 40-year high and accelerated on a monthly basis as food and energy prices climbed sharply.

The personal consumption spending index, which the Fed targets to average 2 percent annual inflation over time, rose 6.1 percent over the previous year. Based on a central estimate in a Bloomberg survey, prices climbed 0.6 percent in December to January, up from 0.4 percent the previous month.

The latest reminder that inflation remains very high comes at a tense moment, as Russia’s invasion of Ukraine pushes prices of oil and other commodities higher and promises to fuel inflation.

The Fed continues to prepare to withdraw its pandemic-era economic support in an effort to slash consumer demand and prices. The White House is monitoring inflation closely as prices for food, rent and gas shake consumer confidence and President Biden’s approval ratings soar ahead of the midterm election in November.

The latest inflation reading will not surprise economists or policy makers – the personal consumption expenditure number is fairly predictable because it is based on data from the Consumer Price Index that comes out more quickly with other data already available. But it would reaffirm that price hikes, which were expected to prove temporary as the pandemic reopened the economy, instead lasted almost a full year and seeped into areas most affected by the coronavirus.

Rapid price increases have affected a wide range of products and services, including used cars, beef, chicken, restaurant food and household goods, and many of the trends risk keeping inflation high. In particular, wages are rising rapidly, and employers are finding that they can pass their climbing labor costs along to shoppers.

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Credit…Amir Hamza for The New York Times

Economists are also eyeing the conflict in Ukraine, which has already caused oil and gas prices to rise and commodity prices are still likely to rise.

Researchers at Goldman Sachs predict that a $10 per barrel oil increase would raise headline inflation in the United States by a fifth of a percentage point, while reducing economic output by less than a tenth of a percentage point.

Global benchmark Brent crude oil rose 6 percent to more than $100 a barrel on Thursday after Russia invaded Ukraine and could move further as Russia’s response to the United States and Europe sanctions. Russia is a major exporter of energy to Europe.

“Potentially, Russia could retaliate by limiting oil exports,” Patrick de Haan, head of petroleum analysis at GasBuddy, said Thursday. The price clash at the pump is likely to have an almost immediate impact, he added.

Some economists have seen an uncomfortable precedent when it comes to gas shocks.

Rising energy prices in the 1970s helped drive inflation, making rapid price increases a permanent feature of the economy, which only faded after the Fed’s painful response. The central bank pushed interest rates – and unemployment – into the double digits to heel the rise in prices now known as the “Great Inflation”.

The incident comes after years of accelerated price hikes that the Fed had proved slow to reduce. This time around, the central bank is gearing up to withdraw support immediately.

The Fed is expected to launch a series of rate hikes in March, policy moves that slow lending and spending, which could translate into weaker recruitment, more weak economic growth and more modest price gains.

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“While the situation in Ukraine does not change, it is likely that the fundamental conclusion is that it is time to change monetary policy,” said Julia Coronado, founder of Macropolicy Perspectives. “They’re not going to postpone raising interest rates just because there’s a war going on in Ukraine.”

While the Fed officially targets headline inflation, it is also keeping a careful eye on a core price measure that separates fuel and food costs, both of which jump from month to month. Headline inflation rose 5.2 percent in January over the previous year, the fastest increase since 1983. It has registered a monthly growth of 0.5 per cent for four consecutive months.

While the Fed has the primary responsibility of controlling inflation by guiding economic demand, the White House is trying to implement policies to help keep supply in line with demand, and keep oil and gas prices from rising. He has pledged to try to do whatever he can to stop it. Unstable level during the Russian conflict.

“I know it’s hard and Americans are already hurting,” Biden said during an address on Thursday. “I will do everything in my power to limit the pain the American people are causing at the gas pump. It’s important to me. But this aggression can’t go unanswered.”

Rising fuel prices are painful for consumers, but economic policy makers usually try to look back on them when setting policy because energy costs are so volatile. But officials are watching closely to see whether inflation in rents, restaurant meals and personal care services continues to climb — a sign that inflation is rising in purchase categories where trends hold for some time.

Strong consumer demand has helped fuel the rise in prices, allowing companies to charge more as buyers keep spending despite the increase in costs. Friday’s report also showed that personal spending climbed 2.1 percent in January from the previous year, beating analyst forecasts in a Bloomberg survey.

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