The main measure of inflation is still rising, and the war may exacerbate it

The gauge of inflation that the Federal Reserve closely monitors accelerated again in January, hitting a new 40-year high and accelerating month-on-month as food and energy prices rose sharply.

The personal consumption expenditures index, which the Fed targets because it aims for an average annual inflation of 2 percent over time, has risen 6.1 percent over the past year. Prices rose 0.6 percent in January from December, up from 0.4 percent in the previous month, based on the central estimate in a Bloomberg survey.

The fresh reminder that inflation remains stubbornly high comes at a tense moment, as Russia’s invasion of Ukraine has pushed up oil and other commodity prices and promises to keep inflation up.

The Fed has been preparing to steadily roll back its economic support in the era of the pandemic in an effort to cool consumer demand and tame prices. The White House is watching inflation closely, as rising food, rent and gas prices rattled consumer confidence and slashed President Biden’s approval ratings ahead of November’s midterm elections.

The new inflation reading won’t surprise economists or policy makers – the PCE number is somewhat predictable because it is based on CPI numbers that come out more quickly, along with other data already available. But it will reiterate that the price increases, which were expected to be temporary as the pandemic economy reopened, instead lasted for almost a full year and crept into areas unaffected by the coronavirus.

Rapid price increases have affected a wide range of products and services, including used cars, beef, chicken, restaurant meals and home furnishings, and many trends are keeping inflation high. Notably, wages are rising rapidly, and employers are finding that they can pass on rising labor costs to shoppers.

Economists are also cautiously eyeing the conflict in Ukraine, which has already caused oil and gas prices to rise and is likely to drive commodity costs higher.

Researchers at Goldman Sachs estimate that an increase of $10 a barrel of oil would increase headline inflation in the United States by five percentage points while reducing economic output by just under a tenth of a percentage point.

Brent crude, the global standard, Increased by up to 6 percent to more From $100 a barrel on Thursday after Russia’s invasion of Ukraine and could rise further as Russia reacts to sanctions from the United States and Europe. Russia is a major energy exporter to Europe.

“It is possible that Russia will respond by limiting oil exports,” Patrick de Haan, head of petroleum analysis at GasBuddy, said Thursday. He said prices at the pump are likely to reflect the fallout from the conflict almost immediately.

Some economists have noted an uncomfortable precedent when it comes to the gas shock.

High energy prices in the 1970s helped exacerbate inflation, causing rapid price increases to become a permanent feature of the economy, a feature that only faded after a painful response from the Federal Reserve. The central bank pushed interest rates – and unemployment – into double digits to curb price hikes during what is now known as “super inflation”.

That incident occurred after years of rapid rate increases that the Fed proved slow to scrutinize. This time, the central bank is preparing to withdraw support immediately.

The Fed is expected to begin a series of interest rate increases in March, policy moves that will slow lending and spending, which could translate into weaker employment, quieter economic growth and more modest price gains.

“The Ukrainian situation probably does not change the basic conclusion that it is time to change monetary policy,” said Julia Coronado, founder of MacroPolicy Perspectives. “They’re not just going to put all the rate increases on hold because there’s a war in Ukraine.”

While the Fed is officially targeting headline inflation, it is also keeping a close eye on the core rate metric that excludes fuel and food costs, both of which rebound from month to month. Core inflation rose 5.2 percent in January from the previous year, the fastest pace of increase since 1983. It recorded monthly increases of 0.5 percent for four consecutive months.

While the Fed has the primary responsibility for controlling inflation by directing economic demand, the White House is trying to implement policies to help supply catch up with demand, and has pledged to try to do what it can to keep oil and gas prices from rising to unsustainable levels during Russian conflict.

“I know this is hard and Americans are really hurt,” Biden said in a speech Thursday. I will do everything in my power to reduce the pain the American people feel at the gas pump. This is very important to me. But this aggression cannot go unanswered.”

High fuel prices are painful for consumers, but economic policymakers usually try to bypass them when setting policy because energy costs are so volatile. But officials are watching closely to see if inflation in rents, restaurant meals and personal care services continues to rise — a sign that inflation is widening into buying categories where trends tend to persist for a while.

Strong consumer demand has helped drive up prices, giving businesses the tools to charge more as shoppers continue to spend despite the cost increase. Friday’s report also showed that personal spending rose 2.1 percent in January from the previous year, topping analysts’ expectations in a Bloomberg survey.