US Inflation Peaks at 7.9% and Surging Rental Rates Imply Worse to Come
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US Inflation Peaks at 7.9% and Surging Rental Rates Imply Worse to Come

US consumer inflation surges by 7.9% fueled by rising petrol, food, and housing expenses, with higher prices still expected to come.
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On Thursday, the US Bureau of Labor Statistics reported a 7.9% increase in prices over the last year,  the highest it has ever been since 1982.

The data covering the 12 months ending in February does not include the increase in oil and gas prices that followed Russia’s invasion of Ukraine. However, surging gas, food, and housing costs propelled the high inflation. Additionally, economic data suggest that the trend will continue and inflation will likely be higher in the short term.

US Inflation Highest in 40 Years at 7.9%, Outpaces Income Gains

Russia’s invasion of Ukraine and the sanctions that followed have pushed consumer prices higher in the US along with the rest of the world. However, for the US strong consumer spending, steady pay raises, and persistent supply shortages were already increasing the inflation rate.

Currently, inflation is outpacing most Americans’ income gains, making it more difficult for them to afford basic needs such as food, gas, and rent. 

According to the US Bureau of Labour Statistics report, inflation increased by 0.8% between January and February, up 0.6% from the previous two months. So-called core prices rose a robust 0.5% month over month and 6.4% year over year, excluding the volatile food and energy categories. Economists more closely track these core prices since they reflect longer-term inflation trends.

Furthermore, almost every category of goods and services increased in price in the time frame covered by the report. Groceries increased 8.6% year-over-year in the 12 months ended in February, the most considerable increase since 1981. Gas prices have risen by a stunning 38%. In addition, housing costs have increased by 4.7%, the most significant annual increase since 1991.

In a bid to tackle this issue, the US government is expected to raise interest rates many times this year. However, the Feds face a delicate challenge: if it tightens credit too much this year, it risks undermining the economy and possibly making it go into a recession.

In a letter to investors, Oxford Economics said that the recent CPI data is likely to lead to rate hikes in the months ahead. It stated:

“The Fed sees its top priority as taming inflation. These strong price data raise the prospect of the Fed starting its tightening cycle with a 50bps [basis points] rate hike at its March policy meeting, followed by consecutive rate hikes at the subsequent meetings”

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Meanwhile, Rent Increase in the US Highest in 30 Years

Rents in the US have increased at their fastest rate in over three decades. This highlights an ever-increasing cost of living expected to contribute even more to inflation this year.

Source: Bloomberg

The Bureau of Statistics data showed that the index for primary residence rent jumped 0.6% in February from the previous month, the most since 1987. This is part of a broader acceleration in the housing costs, contributing over 40% of the monthly increase in a consumer price index excluding food and energy. The chart above clearly shows this sharp increase.

In CPI reports, rents, which have been steadily increasing in the US  for the past year, are published with a lag. This means they will contribute even more to future inflation, which was already at a 40-year high in February.

As a result of Russia’s invasion of Ukraine, supply chains and the availability of essential commodities such as oil are expected to be disrupted. This interference would likely cause an increase in prices of other products and items, which is already happening with metals.

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Do you think the US will be able to control the rising inflation without hurting its economy? Let us know your thoughts in the comments below.