An inflation gauge that is closely monitored by the Federal Reserve rose 6.1 percent in January from a year ago, the latest evidence that Americans are enduring sharp price increases that are likely to worsen after the invasion. Ukrainian Russian.
The figure reported Friday by the Commerce Department was the biggest year-over-year increase since 1982. Excluding volatile food and energy prices, core inflation rose 5.2 percent in January from a year earlier.
Strong consumer spending has combined with widespread shortages of goods and workers to create the highest inflation in four decades, a heavy burden on American households, especially low-income families facing soaring costs for food, fuel and rental.
At the same time, consumers as a whole shrugged off higher prices last month and increased their spending 2.1 percent from December to January, according to Friday’s report, an encouraging sign for the economy and the market. labor. That was a big improvement over December, when spending fell. Americans across the income scale have received pay raises and accumulated more savings than they did before the pandemic struck two years ago. That expanded pool of savings provides fuel for future spending.
However, inflation is expected to remain high and perhaps accelerate in the coming months, especially with the Russian invasion likely to disrupt oil and gas exports. The costs of other basic products produced in Ukraine, such as wheat and aluminum, are also rising.
President Joe Biden said Thursday that he would do “everything possible” to keep gasoline prices in check. Biden gave no details, although he did mention the possibility of releasing more oil from the nation’s strategic reserves. He also warned that oil and gas companies “should not take advantage of this moment” by raising prices at the pump.
The Russian invasion and the likely resulting rise in inflation have increased pressure on the Federal Reserve, which is expected to raise interest rates several times this year starting in March. The Fed’s delicate task – raising rates enough to contain inflation, short of pushing the economy into recession – has now become more difficult.
Fed officials are acknowledging that the Ukraine invasion could upset the central bank’s plans to raise rates. So far, though, lawmakers haven’t offered specific insights into their plans.
Loretta Mester, president of the Federal Reserve Bank of Cleveland, said Thursday that she supported a series of rate hikes beginning in March. But she said the Fed should remain accommodating: It might be necessary to raise rates faster, she said, if inflation hasn’t started to fade by mid-year, or more gradual increases if inflation is slowing.
“The implications of the development of the situation in Ukraine for the medium-term economic prospects in the United States will also be taken into account,” he said.
Other Fed officials have offered similar comments this week.
January data shows that inflation was already picking up before the invasion. From December to January, prices rose 0.6 percent, compared with 0.5 percent the previous month.
There are early signs that consumer spending has remained healthy, buoyed by the rapidly fading Omicron wave of the coronavirus. JPMorgan Chase said spending on its credit cards for airline tickets, hotel rooms and restaurant meals rose in the first half of this month.
The JPMorgan Chase Institute also recently released data showing that cash balances remain high among its clients, including those with lower incomes. The bank account balances of Americans with less than $26,000 in income were 65 percent higher at the end of last year than they were two years earlier.
Americans’ paychecks are steadily increasing. Average hourly earnings increased 5.7 percent in January compared to a year ago. Unless companies can offset their higher labor costs with greater efficiencies, most of them are likely to charge their customers more. This would send inflation higher.
The combination of higher wages and improved savings suggests that Americans can keep spending at a solid pace in the coming months, thus keeping inflationary pressures in the economy.