Inflation Likely to Spike Soon         03/11 06:20

   

   WASHINGTON (AP) -- Inflation likely was elevated last month even before the 
spike in oil and gas prices of the past two weeks that is expected to send 
consumer costs soaring in the months ahead.

   Consumer prices are forecast to have risen 2.5% in February from a year 
earlier when the Labor Department reports last month's figures Wednesday, 
according to a survey of economists by data provider FactSet. That would be up 
slightly from 2.4% in the previous month. Core prices, which exclude the 
volatile food and energy categories, are expected to have also risen 2.5% in 
February, matching January's figure for the lowest in five years.

   But the data will represent an already-faded snapshot of inflation before 
the Iran war was launched Feb. 28, which has caused violent gyrations in oil 
prices as shipping lanes through the Persian Gulf have suffered a rare 
shutdown. Gas prices have already jumped and are expected to push inflation 
much higher when March figures are released next month.

   The price spike will unnerve the inflation fighters at the Federal Reserve 
and could slow consumer spending and weigh on the broader economy. The increase 
could be a one-time event and potentially reverse if the war ends soon, as 
President Donald Trump has hinted. But the spike in gas prices threatens to 
worsen inflation for at least a few months even as Americans are already weary 
from nearly five years of stubbornly high prices that have made "affordability" 
a thorny political issue for congressional Republicans who will soon face 
voters in midterm elections later this year.

   Oil prices soared as high as nearly $120 a barrel late Sunday before rapidly 
falling back Monday after Trump suggested that the conflict would be a 
"short-term excursion." Still, he has also threatened ongoing attacks and it 
isn't clear when the conflict might end.

   Some analysts warn prices will move much higher if the Strait of Hormuz 
remains closed, which has removed roughly three-quarters of the Persian Gulf 
region's oil production from world markets, according to Wood Mackenzie, an 
energy analytics firm. Oil prices could soar to $150 a barrel in the coming 
weeks, the firm forecasts, if shipments don't resume.

   That would push gas prices still higher in the United States, where they 
jumped to $3.54 a gallon on average nationwide Tuesday, according to AAA, an 
increase of about 20% just in one month.

   Over time, higher gas prices will lift some other costs as well, including 
air fares and shipping costs, which could make groceries and restaurant meals 
more expensive.

   At the same time, given the ups-and-downs of oil prices -- U.S. crude prices 
fell nearly 9% to $86.55 Tuesday afternoon -- it is difficult to forecast how 
big the impact will be over time. If shipments resume in a week or so, gas 
prices will likely decline fairly soon, though they typically fall much more 
slowly than they rise.

   Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, a 
consulting firm, expects inflation could jump by as much 0.8% or 0.9% just in 
March from the previous month, when that data is reported next month. It would 
be the largest monthly gain in nearly four years. Yearly inflation could easily 
surpass 3% in that case and potentially near 4% in the following months.

   By comparison, overall prices are projected to climb just 0.3% in February 
from the previous month.

   The jump in gas prices so far this month has been the largest since March 
2022, and before that since June 2009, Rosner-Warburton said.

   "That is enormous," she said. "Increases of that magnitude are highly 
unusual."

   Core prices will be much less affected this month, but could tick higher 
over time as more expensive gas pushes up airline fares and other 
transportation costs. Core inflation is expected to have increased 0.3% in 
February from the previous month.

   Even if the sharp rise is short-lived, it will almost certainly delay any 
interest-rate cut by the Federal Reserve, which meets next week. It cut its key 
rate three times last year before leaving it unchanged at its last meeting in 
January.

   The Fed is already deeply divided over whether it needs to keep its rate at 
its current level of about 3.6% to push inflation down closer to its 2% goal, 
or whether it should reduce the rate to support borrowing, spending, and hiring.

   Last Friday, the government reported an unexpectedly sharp job loss in 
February, as employers slashed 92,000 jobs and the unemployment rate ticked up 
to a still-low 4.4% from 4.3%.

   The weak jobs report puts the Fed in an especially difficult position: It 
would normally reduce rates to boost growth and hiring, but it typically raises 
rates -- or at least keeps them where they are -- if they are worried about 
inflation.

   "That's always the worst-case scenario for the central bank," said Austan 
Goolsbee, president of the Federal Reserve Bank of Chicago, on Bloomberg 
Friday. "As we get more uncertainties, I kind of think that the time at which 
it makes sense to act keeps getting pushed back."

   Gregory Daco, chief economist at EY-Parthenon, a consulting firm, said that 
normally the Fed would expect an oil price shock to have at most a temporary 
impact on inflation and might still cut rates if the economy needed lower 
borrowing costs.

   But Fed policymakers were burnt just a few years ago when they initially 
said the post-COVID inflation spike in 2022-23 -- the worst in four decades -- 
would be temporary, Daco said. As a result, they will be reluctant to take the 
risk of prematurely lowering rates. A few officials even mentioned during the 
January meeting that they might have to hike rates soon, rather than cut them, 
according to the meeting's minutes -- and that was before the Iran war.

   "They do not want to be burned again," Daco said.