The US Inflation Report March 2022 reveals that the inflation rate in the country has reached a level unseen since 1981, primarily driven by escalating energy costs. The Consumer Price Index (CPI) rose by 7.9% through February, marking the fastest annual inflation pace in four decades. Furthermore, supply chain disruptions, increased demand for scarce goods and services, and the Russian invasion of Ukraine, which disrupted the supply of oil, natural gas, wheat, and other commodities, have all contributed to this rise. Despite a slight decline in fuel prices, the cost of rent, gas, and food has significantly impacted lower-income Americans and affected small business owners’ economic confidence. Core inflation also showed a notable increase, and the economy is grappling with worker shortages, leading to increased pay rates and subsequently higher prices. Forecasts indicate that while inflation may have peaked, high inflation rates are expected by mid-2022, prompting possible aggressive interest rate increases throughout the year.

Introduction

By Mike Austin

The US inflation rate in March hit a level not seen since 1981 when Ronald Regan entered the White House. The primary driver was the unabated rise in energy costs. The Consumer Price Index (CPI) rose by 7.9% thru February, the fastest pace of annual inflation in 40 years. In addition to the spike in energy costs, supply chain issues continued to haunt the economy, along with higher demand for scarce goods and services. Furthermore, the Russian invasion of Ukraine further exacerbated cost spikes in the cost of oil, natural gas, wheat, and other commodities that emanated from that region. Ukraine is one of the largest suppliers of wheat in the world (8% of total production worldwide) and the war has disrupted much of that supply.

Impact of Inflation

As a result of these pressures, price increases were broad-based, with the cost of rent, gas, and food being a particular issue for lower-income Americans. These pressures have also impacted small business owners’ short-term confidence in the economy as evidenced in the most recent NFIB survey.

Energy Costs and Inflation

The cost of energy, primarily gasoline, rose 18.3% in March, which accounted for over half of all the items’ monthly increases. On a positive note, fuel prices have declined slightly this month, and for this reason, some economists believe that inflation may have peaked.

Core Inflation

To address the volatility of the CPI due to the inclusion of fuel and food costs, there are 2 versions of CPI, with the term Core Inflation being used to track prices excluding food and energy prices. Unfortunately, Core Inflation also increased markedly, climbing 6.5% in the 1st quarter of March, up from 6.4% in February. It is noteworthy that Core Inflation in March increased a mere .3%, due in part to a 3.8% decrease in the price of used cars, but overall costs are still 35% higher than the same period in 2021.

Factors Contributing to Inflation

Another factor impacting inflation is worker shortages, which has forced many firms to sharply increase pay rates, and in turn, causing them to raise prices to maintain a viable profit margin. Also, as the overall economy tries to shake off the COVID hangover, consumers, the main driver of US economic activity, started returning to restaurants and vacation traveling, which a corresponding rise in component costs; airfare costs rose 10.7%, pushing the annual increase to 23.6%, and hotel rates rose by 3.3% (up 25.1% annually).

Food Cost Statistics

For network advisers that grocery shop, the next batch of food-cost statistics will come as no surprise:

  • Grocery prices rose 1.5% from February to March, which equates to an annual increase of 10%
  • Breakfast cereals (sorry Lucky Charms fans), rose 2.4% in March, or 9.2% annually
  • Rice, pasta, and cornmeal increased 2.8% monthly and 9.3% annually
  • Fresh biscuits, rolls, and muffins rose 2.5% monthly and 10.8% from March 2021
  • Other food products continued long-term price increases:
    • Bacon prices increased 18.2%
    • Chicken prices increased 13.4%
    • Fish prices increased 11.3%
    • Egg prices increased 11.2%

Separately, rent rates rose .4% in March, which translates to an annual rate increase of 4.4%

Forecast for Inflation

An increasing number of economists now believe that inflation may have peaked last month, but it is too soon to confirm. However, it typically takes several months or longer for lower inflation rates to be reflected in economic activity. As a result, many economists are now forecasting high inflation by mid-year (6.4%), and by the end of the year, inflation will possibly be 4.4%, which is well above the FED target rate of 2-2.5%.

This means the rate-setting body will likely continue to increase interest rates aggressively for the balance of 2022, which will, in turn, mean higher interest rates for consumer and small business borrowing. It is hoped, however, that the economy does not repeat the events of the late 1970s and early 1980s in which Prime was above 20% and mortgage rates were well above the mid-teens.

Question & Answer

1. What is the primary driver behind the high inflation rate in the US as per the March 2022 report?

The primary driver behind the high inflation rate in the US as per the March 2022 report is escalating energy costs.

2. How much did the Consumer Price Index (CPI) rise by through February 2022?

The Consumer Price Index (CPI) rose by 7.9% through February 2022, marking the fastest annual inflation pace in four decades.

3. What are some of the factors contributing to the rise in inflation rates mentioned in the report?

Supply chain disruptions, increased demand for scarce goods and services, and the Russian invasion of Ukraine disrupting the supply of commodities like oil, natural gas, and wheat are some of the factors contributing to the rise in inflation rates.

4. How have worker shortages impacted inflation according to the report?

Worker shortages have forced many firms to increase pay rates sharply, leading to higher prices to maintain a viable profit margin, thus impacting inflation.

5. What are the forecasted inflation rates for mid-2022 and the end of the year as per the report?

Forecasted inflation rates for mid-2022 are expected to be around 6.4%, and by the end of the year, inflation is possibly projected to be at 4.4%, well above the FED target rate of 2-2.5%.