'Headline Sticker Shock' Expected in Inflation Data

Soaring gas prices are expected to produce a spike in inflation when the government reports consumer prices for March on Friday, likely unnerving the inflation fighters at the Federal Reserve and heightening the political challenges of rising costs for the White House. Inflation probably rose to 3.4% in March compared with a year ago, economists estimate, which would be a sharp increase from February's 2.4% increase, the AP reports. On a monthly basis, prices are forecast to have risen 0.9% in March from the previous month, according to a survey of economists by data provider FactSet. That would be the largest monthly increase since 2022.

Until now, there had been a slight moderating trend in inflation since last fall. A year-on-year reading of 3.4% would be the highest in nearly two years, and is far above the Fed's 2% target. "There is going to be a headline sticker shock here," said Michael Metcalfe, head of macro strategy at State Street, which produces PriceStats, a measure of inflation culled from millions of online prices. Their data suggests inflation could leap by 1.5% just in March from February.

• Excluding the volatile food and energy categories, core prices are projected to have risen 2.7% in March from a year earlier, up from 2.5% in February. From February to March, core prices are expected to have risen 0.3%, a faster pace than is consistent with the Fed's target.
• Gas prices soared about 20% in March, a move that saps consumers' ability to spend on other goods and services and as a result could also slow economic growth. At least in the short run, many Americans can only make limited changes to their daily driving habits, which are largely determined by where they live, shop, and work. As a result, most people will pay higher prices for gas, and potentially cut back elsewhere. Gas prices averaged $4.17 a gallon nationwide Thursday, up 69 cents from a month ago.

• The big question for consumers and the economy is whether the surge in oil and gas prices will create a sustained, broader inflation shock, similar to what occurred in the aftermath of the pandemic in 2021-2022. Inflation reached a peak of 9.1% in June 2022, as COVID-19 snarled supply chains and several rounds of stimulus checks pushed up consumer demand. Prices soared for groceries, furniture, restaurant meals, and many other goods and services.
• This time, economists say, the job market and consumer spending are weaker, and there are no large government stimulus checks being issued to spur demand. The unemployment rate is low, at 4.3%, but companies aren't scrambling to hire the way they were when the economy emerged from the pandemic, which led many firms to offer sharp pay increases to attract and keep workers.
• Rapid pay increases and solid income growth helped consumers weather the higher prices that resulted from the pandemic's supply chain disruptions, and fueled spikes in demand that led many companies to raise prices further.
• "That's where this really differs, is that we aren't seeing anywhere near the strength of demand," says Alan Detmeister, an economist at UBS Detmeister thinks the better comparison will likely be to 1990-91, when higher oil and gas prices stemming from Iraq's invasion of Kuwait contributed to a recession, but didn't lead to a jump in inflation, in part because of weaker consumer spending.
• For now, economists expect that in March and April the impact will largely be confined to energy-intensive industries, such as airlines, package delivery services and public transportation.
• Still, the large jump in inflation—which is almost certain to continue for several months—has already shifted the debate at the Federal Reserve, which began the year expecting to cut its key interest rate at least a couple of times. But a growing number of Fed officials are now willing to consider hiking rates instead if core inflation doesn't cool noticeably.
• More expensive oil and gas will also likely lift grocery prices, creating more pain for consumers who have already absorbed a roughly 25% jump in food costs since the pandemic. Nearly all groceries are shipped by diesel-fueled trucks, and diesel fuel prices have risen even more than those for regular gas. Still, analysts don't expect food prices to accelerate for another month or two.