Amid years of budgetary inflation, there was at least one silver lining: for the past 34 months, average wages had been increasing faster than the cost of living.
This trend is expected to reverse—and quite soon.
When the March Consumer Price Index (CPI) data is released Friday morning, US inflation is anticipated to have spiked sharply, a direct consequence of the energy shock stemming from the conflict in the Middle East.
Economists project that prices climbed by 0.9% compared to February, which is more than triple January’s rate of increase. Such a jump would propel the annual inflation rate from 2.4% up to 3.4%.
In one fell swoop, inflation could return to levels not seen for almost two years, effectively wiping out the recent gains in American workers’ paychecks.
Last month, the pace of average hourly earnings growth slowed to 3.5%, according to figures released by the Bureau of Labor Statistics.
“We are definitely going to see high prices erode people’s paychecks,” Alice Gould, a senior economist at the Economic Policy Institute, told CNN.
Sharp Rise with Lingering Effects
The ceasefire achieved earlier this week eased some worries that the conflict might deepen rapidly or even be resolved in the near future. Nonetheless, uncertainty persists, as do the potential inflationary fallout.
Even before the war began, inflation was running higher than usual, bolstered by increased costs for tariff-related goods and still-robust—though waning—consumer demand for services.
“Inflationary pressures were already building before the war, and they are now being amplified,” Dean Baker, a senior economist at the Center for Economic and Policy Research, wrote Wednesday.
Inflation is expected to accelerate in the coming months as the war’s consequences ripple beyond gasoline prices and permeate many frequently purchased items and certain services.
The steep rise in gas and energy prices is set to be the dominant driver behind the expected March inflation surge, Samuel Tuombs, Pantheon Macroeconomics’ Chief U.S. Economist, informed CNN.
Pantheon forecasts a 23% increase in gasoline prices, representing the largest monthly jump in the index on record.
“Overall, there have been bigger price shocks, but they have played out over several months,” he noted. “This one has arrived in a single month.”
If Pantheon’s calculations prove correct, the surge in gas prices alone would account for more than two-thirds of the firm’s projected 1% monthly increase in the overall CPI.
That in itself is a major jump, but it’s only the beginning.
“The energy price shock will take many months to filter through to other parts of the economy,” Tuombs explained. “Goods prices don’t adjust immediately, but typically within three to six months, changes in energy costs trickle down to consumers.”
It’s Not Just Oil
Nevertheless, some oil-related price increases may manifest right away. CPI data for airfares, for instance, is based on bookings made during the month, not necessarily the flights actually taken, he pointed out.
Additionally, there might be limited pass-through effects as businesses impose surcharges to cover higher shipping expenses, noted Baker from CEPR. However, such increases are likely to surface more prominently in April’s data, he added.
But the issue extends beyond petroleum. The blockage of the Strait of Hormuz has disrupted the flow of critical materials, including fertilizer, aluminum, and helium.
The resulting rise in fertilizer costs, combined with elevated transportation expenses, could hit grocery stores hard, adding to existing upticks, Baker observed.
“[Food prices] were already climbing rapidly at the wholesale level in February, even before the war,” he wrote. “Sharp increases in fruit and vegetable prices were a key driver, likely connected to the loss of immigrant farmworkers.”
While various inflationary pressures are now exacerbated by the war’s impact, at least one major inflation factor is moving in a welcome direction. Rent and housing-related inflation continue to slow down, providing some dampening effect on the other increases, Tuombs mentioned.
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