It's only going to get worse

Another month, another multi-decade high for US consumer price inflation. The BLS reported this morning that headline CPI rose a higher-than-expected 7.9 percent in the year to February, the largest increase since January 1982. The month-on-month increase was 0.8 percent, up from 0.6 percent in January. 

Perhaps the most ominous thing about today's data is that the survey on which the numbers are based was taken before the Russian invasion of Ukraine began on February 24.  This means that the surge in gasoline prices, which now takes up almost as much of the nightly news bulletin as the invasion itself does, is not captured in the February data.  This points to another increase in the annual rate in March, with the early consensus looking for something in the range of 8.5 percent.

There are few surprises in the details of the report. Even without the full Russia-Ukraine effect, gasoline prices were up 38 percent from a year ago, accounting for fully one third of the overall increase in prices.  Food prices are also rising, led by the food-at-home subcomponent, which rose 1.4 percent in the month to stand 8.4 percent higher than a year ago, the biggest such increase since April 1981. Excluding food and energy, the annual increase in the index is 6.4 percent, better than the headline number but not much consolation for the Fed when its target inflation rate is 2 percent. 

There are now at least a few voices out there calling for the Fed to hold off on interest rate hikes until the uncertainty created by the Russian invasion starts to clear. Although the pace of tightening is likely to be slower than seemed likely until a couple of weeks ago, a rate hike at next week's FOMC meeting is both inevitable and warranted. The Fed can be under no illusion that rate hikes can quickly bring the running level of inflation under control. However, it clearly needs to send a signal of its intent, in order to stop inflation expectations from getting out of hand. It would be unfair to suggest that Jerome Powell and his colleagues should have seen the invasion coming, but it's definitely fair to say that they would look much better today if they had started the tightening cycle back in January.