In March 2022, the Consumer Price Index (CPI), the most common measure of inflation data, rose at an annual rate of 8.5%, which was the fastest rate since December 1981. It’s probably not surprising that a Gallup poll at the end of March found that one out of six Americans considers inflation to be the most important problem facing the U.S.
When inflation began rising in the spring of 2021, many economists, including policymakers at the Federal Reserve, believed the increase would be transitory and subside over a period of months. One year later, inflation has proven to be more stubborn than expected. It may be helpful to look at some of the forces behind rising prices, the Fed’s plan to combat them, and early signs that inflation may be easing.
Hot Economy Meets Russia and China
The fundamental cause of rising inflation continues to be the growing pains of a rapidly opening economy — a combination of pent-up consumer demand, supply-chain slowdowns, and not enough workers to fill open jobs. Loose Federal Reserve monetary policies and trillions of dollars in government stimulus helped prevent a deeper recession but added fuel to the fire when the economy reopened.
More recently, the Russian invasion of Ukraine has placed upward pressure on already high global fuel and food prices. At the same time, a COVID resurgence in China led to strict lockdowns that have closed factories and tightened already struggling supply chains for Chinese goods. The volume of cargo handled by the port of Shanghai, the world’s busiest port, dropped by an estimated 40% in early April.
Behind the Headlines
Although the 8.5% year-over-year “headline” inflation in March is a daunting figure, monthly data provides a clearer picture of the current trend. The month-over-month increase of 1.2% was extremely high, but more than half of it was due to gasoline prices, which rose 18.3% in March alone. Despite the Russia-Ukraine conflict and increased seasonal demand, U.S. gas prices have remained fairly stable in April. The federal government’s move to release one million barrels of oil per day from the Strategic Petroleum Reserve for the next six months and allowing summer sales of higher-ethanol gasoline may help moderate prices.
Core CPI, which strips out more volatile food and energy prices, rose 6.5% year-over-year in March, which was the fastest rate since 1982. However, the month-over-month increase from February to March was just 0.3%, the slowest pace in six months. Another positive sign was the price of used cars and trucks, which rose more than 35% over the last 12 months (a prime driver of general inflation) but dropped 3.8% in March.