The numbers: Consumer prices in March rose for the fourth consecutive month and inflation rates hit a two-and-a-half-year high, highlighting new pressures on the economy as the United States recovers from the coronavirus.
The consumer price index rose 0.6% in the previous month, the government said Tuesday, led by rising oil prices. Economists polled by Dow Jones and The Wall Street Journal have forecast the CPI to rise 0.5%.
The inflation rate over the past 12 months has soared to 2.6% last month from February’s 1.7%, marking the highest level since fall 2018.
Annual inflation rate is forecast to increase over the next few months.
One major reason is that the faster US recovery has been fueled by a massive federal stimulus and a sharp drop this year in coronavirus infections. That drives demand for a wide variety of goods and services at a time when supplies of many critical materials are in short supply.
Inflation also turned to negative in March and April 2020 during the first phase of the pandemic when the US economy was mostly contained. When these indicators break out of the 12-month average, it makes inflation even worse.
The annual inflation rate is likely to settle by the end of the year, but it could reach 3% in the near future and put further pressure on the Federal Reserve. The last time inflation hit 3% was a decade ago.
Fed leaders insist any inflation spike could be mild and temporary.
The Fed predicted in March that inflation would average 2.4% by 2021, using its preferred PCE price measure. The inflation rate will then fall back to the central bank’s 2% target by 2022.
The Biden White House, interested in raising Treasury rates, has come to the same conclusion as the central bank. The president’s top economists argued in a new article on Monday that inflation fears are being overblown.
Big picture: Without a doubt, inflation is on the rise and will continue to rise in the coming months.
Part of the increase simply reflects a natural recovery after the inflation rate nearly dropped to zero at the beginning of the crisis.
Tensions on the global economy from the pandemic are also leading to higher prices. Some of the main supplies are difficult to obtain due to production or shipping disruptions and that increases inflation.
The faster-than-expected US recovery also played a role. Businesses were stunned by the sharp increase in demand for cars, new homes and many other goods and services. Some economists argue that the government’s stimulus is excessive and contributes to increased demand.
Anyone can guess when inflation drops to a low level. A recent survey shows that business Economists believe that the rising inflation threat is the highest in decades.
If inflation is higher than 3% or even higher, pressure on the Fed to raise interest rates or break its easy money strategy may increase.
And it becomes more expensive for consumers to buy a car, house or lend money to businesses, all of which can threaten to slow the recovery process.
Market reaction: Dow Jones industrial average
and S&P 500
was set to lower in Wednesday deals. 10-year Treasury yield
unchanged at 1.67% after the CPI report.