Consumer prices continued to heat up in February, jumping 0.8% month-on-month (m/m). That marks an acceleration from the prior two months’ pace. That drove the year-on-year (y/y) pace of inflation to 7.9%, the fastest pace in over 40 years.
Not surprising to anyone who has filled up their tank this winter, the 6.6% m/m jump in gasoline prices was a key driver, accounting for almost a third of the headline increase. Food price gains also accelerated, rising 1.0% m/m. Food prices were up 7.9% versus a year ago in February.
Core inflation (ex. food and energy) also jumped up 0.5% m/m, tiptoeing down from January’s 0.6% gain. As a result, the year-on-year rate of core inflation picked up to 6.4%, also a new post-pandemic high.
Shelter costs were once again a key contributor to monthly inflation, rising 0.5% m/m and accounting for 40% of the increase in core prices. Shelter inflation is up 4.7% year-on-year, the fastest pace since 1991. But prices were also up strongly elsewhere: recreation (+0.7% m/m), household furnishings and operations (+0.6% m/m), motor vehicle insurance (+1.2% m/m), personal care (+1.2% m/m), airline fares (+5.2% m/m), and apparel (+0.7% m/m).
Notably, used vehicle prices fell 0.2% m/m and new vehicle prices were up 0.3% m/m – a modest gain compared to recent history. Vehicle prices have been a key source of inflation over the past year.
Core goods inflation rose 0.4% m/m in February, a big step down from the 1% monthly gains they had averaged since October. Unfortunately, as core goods inflation cools, core services inflation picked up, rising 0.5% m/m.
Key Implications
Another month, another new high for inflation. Unfortunately, things are about to get worse before they get better. Russia’s war in Ukraine has pushed prices for many commodities sky high, and these will boost headline inflation in the coming months. Headline CPI inflation will almost certainly top 8% in March, how long it will remain there depends on the highly volatile path of oil prices and to what degree higher agricultural commodity prices are passed on at the grocery store.
We still expect inflation to move downward over the course of 2022. With food and energy prices likely to see continued upward pressure due to the war, easing inflation will show up in core prices first. We are starting to see inflation for one previously problematic area (new and used vehicle prices) ease. And, as we move into the spring, base effects will pull the annual rate of core inflation lower. Core inflation rose 7.8% annualized in the second quarter of 2021 (or 0.8% m/m on average) as a rapidly reopening economy saw prices surge for many travel-related goods and services. Core prices would need to exceed that pace this spring to prevent the pace from decelerating.
Economists focus on core inflation to gauge underlying price pressures in the economy, because food and energy prices are volatile and often mean revert. But consumers pay for the full basket of goods. Even with healthy wage gains due to a tight labor market, inflation is going to weigh on consumer spending in real terms, slowing growth in the broader economy. The Fed is set to raise interest rates next week, but how many hikes we ultimately see depends on how much the war tightens financial conditions and slows economic growth in the coming months.
