Inflation gauge climbs 6.1% in January

WASHINGTON — A closely watched inflation gauge by the Federal Reserve jumped 6.1% in January from a year ago, the latest evidence that Americans are facing steep price increases that will likely worsen after the fall. invasion of Ukraine by Russia.

Friday’s Commerce Department figure was the biggest year-over-year rise since 1982. Excluding food and energy price volatility, core inflation rose 5.2% in January compared to the previous year.

Robust consumer spending has combined with widespread shortages of goods and workers to create the highest inflation in four decades – a heavy burden for American households, especially low-income families facing high food costs , fuel and rent.

Meanwhile, consumers as a whole largely ignored higher prices last month and increased their spending by 2.1% from December to January, according to Friday’s report, an encouraging sign for the economy and the labor market. This is a marked improvement from December, when spending fell. Americans of all income levels have received pay raises and amassed more savings than they had before the pandemic hit two years ago. This expanded pool of savings provides fuel for future expenses.

Inflation, however, is expected to remain high and possibly accelerate in the coming months, especially with the Russian invasion likely to disrupt oil and gas exports. The costs of other commodities produced in Ukraine, such as wheat and aluminum, have also increased.

President Joe Biden said Thursday he would do “everything I can” to control gasoline prices. Biden did not elaborate on specifics, although he did mention the possibility of releasing more oil from the country’s strategic reserves. He also warned that oil and gas companies “should not exploit this moment” by raising prices at the pump.

On Friday, oil prices were flat after hitting $100 a barrel in volatile trading on Thursday, before falling back to $92, around where they started the day. Still, JPMorgan economists have forecast oil could hit $110 a barrel as the Russian invasion of Ukraine intensifies. BMO Capital Markets economists have estimated that every $10 a barrel increase translates to a 0.4 percentage point rise in inflation.

A separate report on Friday showed that orders for factory durable goods rose sharply in January, led by an increase in demand for aircraft. The figures indicate that many companies are ready to invest more in industrial equipment and other goods, a sign of confidence in the economy.

“Overall, the real economy appears to be in better shape than we feared,” said Paul Ashworth, chief U.S. economist at Capital Economics, a forecasting firm.

Incomes were flat last month, largely because monthly child tax credit payments that were included in Biden’s $1.9 trillion financial support package expired. A new study has concluded that the end of payments has led to an increase in child poverty.

But wages and salaries rose 0.5% from December to January, according to Friday’s report. And Social Security payments rose because a major cost-of-living adjustment, reflecting last year’s jump in inflation, took effect.

The invasion of Russia and the likely rise in inflation that results has increased the pressure on the Fed, which is expected to raise interest rates by a quarter point up to five or six times this year from Of March. The delicate task of the Fed – to raise rates enough to contain inflation, without going so far as to tip the economy into recession – has now become more difficult.

Higher gas prices generally accelerate inflation, which would increase the need to raise prices. But more expensive gas can also weaken the economy by slowing consumer spending, which would normally lead the Fed to leave rates unchanged.

Fed officials acknowledge that the Ukraine invasion has complicated the economic outlook, but say that so far they are sticking to their rate hike plans.

Late Thursday, Fed Board of Governors Christopher Waller said he would support a half-point rate hike in March if inflation remained elevated. However, most other Fed policymakers indicated they were inclined to favor a more typical quarter-point increase.

Fed officials want inflation to fall back to its 2% target, as measured by the Commerce Department’s gauge, released on Friday. A separate measure, the Consumer Price Index, released two weeks ago, showed inflation hit 7.5% in January from a year earlier, also a four-decade high.

January data shows that inflation was already rising before the invasion. From December to January, prices increased by 0.6%, compared to 0.5% the previous month.

A Fed report on Friday showed inflation has spread beyond pandemic-hit industries, such as new and used cars, in which prices have jumped to double-digit annual rates. More than three-fifths of all goods and services are now seeing price increases of at least 3% a year, according to the Fed, nearly double the pre-pandemic level. At the same time, this remains well below the proportion of the 1970s, when more than 90% of goods and services reflected price increases at least as high, according to the report.

There are early indications that consumer spending remained healthy in February, boosted by the rapid disappearance of the omicron wave of the coronavirus. JPMorgan Chase said spending on its credit cards for airline tickets, hotel rooms and restaurant meals increased in the first half of this month.

The JPMorgan Chase Institute also recently released data showing that cash balances remain high among their customers, including those with low incomes. The bank account balances of Americans with less than $26,000 in income were 65% higher at the end of last year than they were two years earlier.

The combination of higher wages and increased savings suggests Americans may be able to keep spending at a healthy pace in the coming months, supporting inflationary pressures in the economy.

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