Inflation Accelerates to 8.5%—But Is It the Peak?

Inflation heated up even more in March, driven by big jumps in gasoline and groceries—but there were hints that we’re in the worst of it now, and it could start getting better soon.

The U.S. inflation rate rose to 8.5% in the year through March, up from 7.9% in the year through February, marking the fastest 12-month clip since 1981, the Consumer Price Index showed Tuesday. A 1.2% increase in March alone was double the pace just a couple of months ago. More than half of that stemmed from gas, which rose 18.3%, almost triple the February pace. Food was another big factor, with grocery store price hikes accelerating to 1.5% from 1.4% in February.

The Bureau of Labor Statistics data confirms what shoppers can already see on trips to the gas pump and grocery store: the cost of living is rising rapidly. Economists said the Russian invasion of Ukraine likely exacerbated supply shortages that have fueled inflation for the past year. Sanctions against Russia, a major supplier of oil to the global market, drove higher prices for oil and the gas that’s made from it, and disruptions to the grain supply from Ukraine and Russia have made food more expensive around the world. 

But some economists were cautiously optimistic that things may be about to turn a corner, noting that so-called “core” inflation—which excludes food, gas and other energy prices—rose just 0.3% in March, less than the 0.5% in February or than economists had expected. Prices for used cars (which rose relatively relentlessly through most of the pandemic) fell for a second straight month, and gas prices have fallen a bit since March.

“March will likely be the peak for inflation,” Katherine Judge, a senior economist at CIBC Capital Markets, said in a commentary.

The inflation rate was in the 2% range for the years preceding the pandemic but has shot up in the past year to over four times that, as demand has outstripped supply. The 8.5% only makes it more likely that the Federal Reserve will hike its benchmark interest rate by a half percentage point when it next meets in May, economists said. 

“Underlying inflation eased in March, but it's still too soon to wave the all-clear flag on the inflation front,” Sal Guatieri, a senior economist at BMO Capital Markets said in a commentary, noting that inflation will be slow to retreat since things like food and housing—which rose 0.5% in March—are showing no signs of letting up.

Whether the inflation rate has peaked or not, there’s no doubt that rising prices have put such a big dent in people’s buying power that even rapidly growing wages haven’t been able to keep up. Employers have been raising wages as they compete for workers to fill the large number of job openings they have, but if you factor in inflation, wages actually fell for the sixth straight month in March, the BLS said in a separate report. This so-called “real earnings” measure is down 2.7% since last March.

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