A key inflation gauge jumped 6.6% in March, the most since 1982

WASHINGTON (AP) — An inflation gauge closely watched by the Federal Reserve rose 6.6% in March from a year ago, the highest 12-month jump in four decades and further evidence that rise are putting pressure on family budgets and the health of the economy. .

However, there were signs in Friday’s Commerce Department report that inflation may be slowing from its galloping pace and perhaps approaching a peak, at least for now.

And despite sky-high prices, consumer spending rose faster than inflation for the third month in a row, suggesting rising prices haven’t dampened Americans’ desire to buy. Pandemic distortions in the economy are also fading as consumers return to spending on experiences like travel, concerts and dining out. That follows a two-year surge in pandemic spending on goods, things like stationary bikes, lawn furniture and standing desks.

The switch to services helps contain inflation because the prices of services rise more slowly than those of goods.

Excluding the especially volatile food and energy categories, so-called core prices rose 5.2% in March from a year earlier. That was slightly down from the 5.3% year-over-year increase in February, and it was the first time that 12-month figure had declined since February 2021, before peak inflation began. And month over month, core prices increased 0.3% from February to March, the same as from January to February. Previously, it had risen half a point for four consecutive months.

“It’s really nice to see (core inflation) slowing down,” Bill Adams, chief economist at Comerica Bank, said in an email to clients. “Inflation may have peaked in March, although the evidence is still a bit ambiguous. But the push from inflation is still very strong.”

Headline inflation jumped 0.9% in March from February, the biggest monthly gain since 2005. Gasoline prices soared 18% in March alone. But they have since fallen a bit this month, another sign that inflation may slowly start to ease.

Consumers increased their spending by 1.1% last month, more than many economists expected. The gain largely reflected higher prices at the gas pump, the grocery store and other places where Americans shop for necessities. But even adjusted for inflation, spending was up 0.2%.

Strong wage and salary gains are helping many consumers manage higher costs. A separate report Friday from the Labor Department showed employee pay and benefits rose 1.4% in the first three months of the year, before adjusting for inflation. That was the largest such increase in records going back two decades.

However, the gain is not large enough to fully offset the higher prices. In the last year, salaries and benefits increased 4.7%. But after adjusting for inflation, they are down 3.7%.

That decline helps explain why Americans have an increasingly negative view of the economy. About a third of respondents in a Gallup poll released Thursday named inflation as the most important financial problem facing their family today, up from less than one in 10 who said so a year ago.

Consumers keep their spending down by taking advantage of the extra savings they accumulated during the pandemic. The savings rate fell to 6.2% in March, the lowest level since 2013.

A smaller savings pool may eventually restrict consumers, but that’s unlikely in the short term.

Americans have about $2.1 trillion more in savings than they did before COVID, and some of that cash is in low-income Americans’ bank accounts. Bank of America economists note that according to the bank’s data on checking and savings accounts, households earning less than $50,000 a year had an average of about $3,000 in their accounts in February, about double the previous level. to the pandemic.

High inflation and strong wage increases are leading the Federal Reserve to plan a series of sharp interest rate hikes in the coming months. The Fed is set to raise its short-term benchmark rate by half a point next week, a move faster than its typical quarter-point hike and the first increase this large since 2000.

Outside the United States, too, inflation is rising, forcing other central banks to raise interest rates or come close to doing so. In the 19 countries that use the euro, inflation hit an all-time high of 7.5% in April from a year earlier.

In Europe, rising energy prices stemming from the Russian invasion of Ukraine are playing a larger role in driving inflation. The European Central Bank could raise rates for the first time since the pandemic in July, even as growth in the region has slowed due to the war.

The pessimism that has gripped public opinion as inflation has accelerated poses a growing political threat to President Joe Biden and Democrats running for Congress. Biden has pointed to a strong job market and strong consumer spending as evidence that his policies have helped Americans. But that view absorbed a setback on Thursday, when the government reported that the economy actually shrank in the first three months of this year at an annual rate of 1.4%.

How consumers respond to inflated prices, and much higher interest rates from the Federal Reserve, is one of the unknowns facing the economy this year. Moody’s Analytics estimates that the average household spends $327 more each month to buy the same things they bought a year ago.

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