Consumer inflation in March is expected to be the hottest since 1981

A customer selects groceries from a freezer at a supermarket on January 12, 2022 in New York City.

Liao pan | China news service | Getty Images

CPI inflation in March is expected to have risen the most since December 1981, driven by higher food costs, rising rents and galloping energy prices.

The consumer price index is due to be released at 8:30 a.m. ET on Tuesday, and economists expect a monthly increase of 1.1% and an annual gain of 8.4%, according to the Dow Jones. This compares with February’s rise of 0.8%, or 7.9% year-on-year, the highest since early 1982.

“It’s going to get ugly,” said Mark Zandi, chief economist at Moody’s Analytics. “It’s a perfect storm – Russian invasion, soaring oil prices, China’s lockdown, further supply chain disruptions, accelerating wage growth, job vacancies. Just some sort of mess leading to painfully high inflation. We are fighting our way through two massive global supply shocks. It would be hard to imagine that we are not suffering from higher inflation.”

According to the Dow Jones, core inflation excluding food and energy is expected to rise half a percent – same as in February – up 6.6% from 6.4% yoy.

“The good news is that it looks like it’s going to peak because of oil prices,” said Diane Swonk, chief economist at Grant Thornton. Oil prices rose shortly after Russia’s invasion of Ukraine in late February, reaching a peak for West Texas Intermediate oil futures of $130.50 a barrel in early March. That price fell to around $94 a barrel on Monday.

Gasoline prices also rose, reaching a national average of $4.33 per gallon of unleaded gasoline on March 11, according to the AAA. That price on Monday was $4.11 a gallon.

“The problem for the Fed is the spread of inflation from goods to services and also because used car prices could pick up again,” Swonk said. “The problems in the supply chain are not going away. They’re getting worse.”

Based on base effects alone, economists say this month or next month could be the peak of inflation. Zandi Projects headline CPI will fall to 4.9% by the end of this year.

The US Federal Reserve is expected to aggressively tighten monetary policy to curb the hottest inflation in four decades. Markets are expecting a half-point hike in May, and economists say a hot inflation report could also bring a half-point hike in June.

“The Fed is on track. It’s a hike of at least half a percent and the balance sheet contractions are starting,” he said.

The Fed raised interest rates by a quarter point for the first time in March after cutting the Fed interest rate to zero in early 2020.

Jefferies money market economist Tom Simons expects the Fed to hike rates by 50 basis points at its May 3 meeting, and he said the CPI shouldn’t change that. “If it’s dramatically higher than expected, which I don’t think will be the case, we’re going to be talking about a 75 basis point hike or something in between,” he said. “That’s quite nonsense in my opinion.” One basis point equals 0.01%.

Simons said energy prices are expected to rise 18% in CPI in March. “This first half of March was particularly acute after the Russian invasion. Food prices are a similar story, but not nearly to the same extent. … Housing is going to be a pretty big factor again,” he said.

He expects the owner-equivalent rent, or cost of a home in CPI, to rise about 0.5%, while rents should rise 0.6% monthly. The cost of accommodation is one area that is expected to continue to rise. That would push housing, which accounts for a third of the CPI, up 4.6% year over year.

Swonk said increases in housing costs are the highest since the early 1990s and could continue to rise. “I think there’s a risk of it coming in on the hot side,” she said.

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