Inflation continues at a four-decade high, with costs of shelter, food and gasoline surging.
By David Enna, Tipswatch.com
The numbers are ugly, but today’s inflation report mostly matched economist expectations, despite hitting a 41-year high.
The Consumer Price Index for All Urban Consumers increased 0.8% in February on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported. Over the last 12 months, the all-items index increased 7.9%. The monthly number slightly exceeded expectations, but the year-over-year number matched predictions.
Annual U.S. inflation of 7.9% is the highest for any year ending in February since 1981, when inflation soared to 11.4%.
Core inflation, which eliminates food and energy, rose 0.5% in February and is up 6.4% year-over-year. Both these numbers matched expectations.
The BLS noted that increases in the costs many American staples — gasoline, shelter, food and apparel — led the way on price increases. This is a high-pain event. Here are some of the data:
- Gasoline prices increased 6.6% for the month and are up 38% over the last year. Remember, this is the February number, and does not factor in strong increases so far in March. The BLS said gas prices accounted for almost a third of the overall gain in monthly inflation.
- The food at home index increased 1.4% and is up 8.6% over the last year.
- The index for fruits and vegetables rose 2.3%, its largest monthly increase since March 2010.
- The index for meats, poultry, fish, and eggs increased 1.2% in February.
- Shelter costs rose 0.5% in February and are up 4.7% for the year. The BLS said shelter costs accounted for more than 40% of the increase in core inflation. This was the largest 12-month increase in the shelter index since May 1991.
- Apparel costs were up 0.7% in February, after rising 1.1% in both December and January.
- On the positive side, the costs of medical care services rose only 0.1%, and prices of medical care commodities were up a moderate 0.3%.
- Also, prices for used cars and trucks, which had been soaring, fell 0.2% in the month but remain 41.2% higher year over year. Costs for new vehicles rose 0.3%.
Side note: I did a search for the word “largest” in the BLS news release, and I found the document contained that word 12 times, across a broad spectrum of price categories. These are history-making numbers, and March will probably get worse with the sudden, steep surge in gas prices.
Here is the one-year trend for all-items and core inflation, showing the incredible surge higher. Hard to believe that annual inflation in February 2021 was running at a mundane 1.7%.
What this means for TIPS and I Bonds
Investors in Treasury Inflation-Protected Securities and U.S. Series I Savings Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust TIPS principal balances and set future interest rates for I Bonds. For February, the BLS set the inflation index at 283.716, an increase of 0.91% over the January number.
For TIPS. The February inflation report means that principal balances for all TIPS will be increasing 0.91% in April, following an 0.84% increase in March. For the year ending in April, principal balances will have increased 7.9%, a remarkable — and let’s admit it, unexpected — surge higher. Remember, the reason for investing in TIPS is to protect against “unexpectedly” high inflation. That strategy is working.
Here are the new April Inflation Indexes for all TIPS.
For I Bonds. The February report is the fifth of a six-month string that will determine the I Bond’s new inflation-adjusted variable rate, which will be reset on May 1 for all I Bonds. So far, inflation from September 2021 to February 2022 has been running at 3.43%, which translates to a variable rate of 6.86%. One month remains, and March inflation is likely to be quite high. It’s easy to see the possibility of a variable rate exceeding 8% — or even 9% — at the May reset, higher than the current rate of 7.12%.
One factor to consider, however: Non-seasonally adjusted inflation increased 0.71% in March 2021, setting up a rather high number for March 2022 to beat. Gasoline prices rose 9.1% in March 2021 over February 2021. That will lessen the effect of this year’s sudden surge, but only in the year-over-year number. Clearly, gasoline prices have increased in March 2022 over February 2022, and that will push up the March monthly number.
If, for example, non-seasonally adjusted inflation rises 0.9% in March — definitely possible — then the six-month inflation number would be 4.33%, creating a variable rate of 8.66%. If it hits 1.0%, the variable rate would rise to 8.86%.
Does that mean you should wait until after May 1 to invest in I Bonds, which have a purchase cap of $10,000 per person per year? Absolutely not. If you buy an I Bond before May 1, you will earn an annualized 7.12% for a full six months, and then the new variable rate for the next six months. Buying before May 1 — in my opinion — is the way to go.
Here are the numbers so far, which I track on my “Inflation and I Bonds” page:
What this means for future interest rates
While the February inflation report could reasonably be called “shocking,” increases of this level were clearly predicted and should not have much effect on the Federal Reserve’s near-term actions. But I believe the market turmoil caused by the war in Ukraine and surging gas prices will cause the Fed to go the moderate route in raising short-term interest rates.
I think the Fed will raise its federal funds rate by 25 basis points next week, and then continue with 25-basis-point increases at points through the year and next year, eventually hitting a target of 1.50% to 1.75%, up from current level of 0.0% to 0.25%. That’s a total of five rate increases, but who knows.
The March inflation report will be ugly, reflecting the spike higher in gasoline prices and related transportation costs. The threat of recession is at least “looming,” and that should hold down longer-term interest rates as the yield curve flattens. After March, inflation could begin sliding lower, but nowhere near the Fed’s target of about 2.25%.
This insight is from inflation guru Michael Ashton, @inflation_guy on Twitter:
“So wrapping up: there’s no real sign of any ebbing of inflation pressures. In fact, there are some signs that food inflation will stay elevated for longer than the normal oscillation cycle. But we are closer to the end of the spike, anyway, than to the beginning. …
“Core inflation will likely peak next month, and headline inflation in the next couple of months. That’s good. But we’re not going to go back to 2%. Right now, the monthly prints point to an underlying core rate around 6%. I suspect we will end 2022 in the 5s, or high 4s.”
Right now, the only very predictable thing is “uncertainty.”
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he discusses can purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
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