The Consumer Price Index (CPI) in the United States soared in February to 7.9%, culminating in the largest annual increase in 40 years, and inflation is set to accelerate in the coming months, as the Russian war and Ukraine would raise the costs of crude oil and other raw materials.
The rise came after a 7.5% gain in January and was the fifth consecutive month that the CPI was above 6%.
Inflation has far exceeded the 2% target set by the Federal Reserve (Fed). The central bank is expected to start raising interest rates next week to fight inflation, with economists estimating as many as seven more hikes this year.
Last month’s CPI data does not fully reflect the rebound in oil prices after the Russian invasion that began on February 24.
Oil prices soared more than 30% and Brent, the world benchmark, reached its highest since 2008 at $139 a barrel, before declining on Wednesday, after it became known that the United Arab Emirates will ask its partners in the OPEC an increase in production.
The United States and its allies have imposed tough sanctions on Moscow, and President Joe Biden has banned the import of Russian oil into the country. Russia is the world’s second largest exporter of crude oil.
“The Russo-Ukrainian war further fuels the skyrocketing rate of inflation through rising prices for energy, food and basic raw materials, which are inflated by worsening supply chain problems,” he said. Kathy Bostjancic, Chief Economist at Oxford Economics.
“This will lead to a higher peak of inflation in the short term and a slower-than-expected deceleration in 2022”, and forecast inflation “of almost 6.5% average in 2022; in 2021 it was 4.7 percent.
“Russia is the third largest oil producer in the world, behind Saudi Arabia and the United States,” explained Diane Swonk, chief economist at Grant Thornton. “Even though we don’t buy much from them, oil prices are set based on global supply and demand,” she remarked.
Inflation was already a problem before the war due to the shift of spending towards goods from services during the Covid-19 pandemic. Billions of dollars earmarked for pandemic relief have fueled spending, which hit capacity constraints as the coronavirus upended labor market dynamics.
Excluding volatile food and energy components, the CPI was 0.5% last month, from 0.6% in January. In the 12 months through February, the core CPI was 6.4 percent. This is the biggest annual rise since August 1982 and follows a 6% rise in January.
For their part, applications for state unemployment benefits increased by 11,000; to a seasonally adjusted figure of 227,000 the previous week.