The numbers: Consumer prices rose in March for the fourth month in a row and the pace of inflation hit the highest level in two and a half years, underscoring new pressures emerging on the economy as the U.S. recovers from the coronavirus.
The consumer price index jumped 0.6% last month, the government said Tuesday, spearheaded by the rising cost of oil. Economists polled by Dow Jones and The Wall Street Journal had forecast a 0.5% increase in the CPI.
The rate of inflation over the past 12 months shot up to 2.6% last month from 1.7% in February, marking the highest level since the fall of 2018.
The yearly rate of inflation is widely expected to surge in the next few months.
A chief reason is a faster U.S. recovery fueled by massive federal stimulus and a sharp drop this year in coronavirus cases. That’s boosting demand for a wide array of goods and services at a time when when many key materials are in short supply.
Inflation also turned negative March and April of 2020 in the early stages of the pandemic when the U.S. economy was largely locked down. As those readings drop out of the 12-month average, it will make inflation even worse.
The yearly rate of inflation is likely to settle down later in the year, but it could top 3% in the near future and put more pressure on the Federal Reserve. The last time inflation topped 3% was a decade ago.
Fed leaders insist any increase in inflation is likely to be mild and temporary.
The Fed predicted in March that inflation would average 2.4% in 2021, using its preferred PCE price measure. The rate of inflation would then drop back down to the central bank’s 2% target by 2022.
The Biden White House, mindful of rising Treasury rates, has drawn the same conclusion as the central bank. The president’s top economists argued in a new paper on Monday that inflation worries are vastly overblown.
Big picture: There’s no doubt inflation is rising and will continue to do in the months ahead.
Part of the increase simply reflects a natural rebound after the rate of inflation nearly fell to zero early in the crisis.
The strains on the global economy from the pandemic are also feeding into higher prices. Some key supplies are hard to come by become of production or shipping disruptions and that’s pushing up inflation.
The faster than expected U.S. recovery is also playing a role. Businesses have been taken aback by the sharp increase in demand for new cars, houses and many other goods and services. Some economists contend government stimulus is excessive and contributing to the surge in demand.
When inflation levels off is anyone’s guess. A recent survey shows that business economists believe the threat of rising inflation is the highest in decades.
If inflation charges past 3% or heads even higher, pressure on the Fed to raise interest rates or junk its easy-money strategy are likely to grow.
And it will become more expensive for consumers to buy a car or house or for businesses to obtain a loan, all of which could threaten to slow the recovery.
Market reaction: The Dow Jones Industrial Average
and S&P 500
were set to lower in Wednesday trades. Yields on the 10-year Treasury
were unchanged at 1.67% after the CPI report.