Inflation Rose Even Higher Last Month

Consumer spending growth is feeling the sting of rising prices, while supply chain issues aren’t going away any time soon.

April 01, 2022

Global Supply Chain and Inflation

ALEXANDRIA, Va.—Inflation hit a new 40-year high in February, reports the Wall Street Journal. The U.S. Commerce Department’s personal-consumption-expenditures price index was up 6.4% in February compared with February 2021, a faster gain then the 6% increase for the year that ended in January. The February rise was the fastest since 1982. Annual core PCE inflation, which does not include volatile food and energy prices, rose to 5.4% in February.

Separately, the U.S. Bureau of Labor Statistics reported this morning that total nonfarm payroll jobs rose by 431,000 in March, and the unemployment rate fell to 3.6%. Job growth occurred in food services and drinking places (+61,000), accommodation (+25,000) and retail trade (+ 49,000), including general merchandise stores (+20,000) and food and beverage stores (+18,000). In March, 10% of Americans with jobs teleworked specifically because of the coronavirus pandemic, down from 13% in February, the bureau reported.

The Federal Reserve, under pressure to continue to lift interest rates, raised its benchmark rate last month for the first time since 2018 and has plans for six more increases, which is its most aggressive pace in more than 15 years. Mortgage rates are the highest they’ve been since 2018, with the average rate for a 30-year fixed-rate home loan at 4.67%.

Inflation has begun to weigh on consumer spending growth, which is a major economic fuel. Consumer spending came to a near halt, with U.S. households increasing their spending at a seasonally adjusted 0.2% pace in February compared to January. Last month, consumer spending was at a revised 2.7% rate.

Personal income was up 0.5% in February over January, but because inflation rose, income after taxes, adjusted for inflation, fell for the seventh straight month in February to the lowest level since March 2020.

Inflation “will be an even bigger drag in March with surging energy prices in the wake of the Russian invasion of Ukraine,” Gus Faucher, chief economist at the PNC Financial Services Group, told the Journal.

With the Omicron variant in the rear-view mirror, consumers spent more on restaurants and traveling, with services spending up 0.9% in February, which was the highest services spending rate since July 2021. Airline executives say that air travel has returned faster than anticipated, with major airlines expecting first-quarter revenues to be at the high end of what was planned or better.

Global supply chain issues are not improving like expected by this point, and experts say they are getting worse, reports CNN. One segment of the economy hit hard is vehicle production, with pandemic supply issues making it difficult for auto makers to get their hands on manufacturing components like semiconductors.

But now, due to Russia’s invasion of Ukraine, there is another impact on car manufacturing. Although neither country make computer chips, Ukraine is the world's leading source of neon, which is needed for the lasers used in the chip-making process.

"People expected the semiconductor shortage to continue. But nobody predicted Ukraine," Bernard Swiecki, director of research at the Center for Automotive Research, told CNN.

Three weeks before Russia’s attack on Ukraine, GM said it would be able to build 25% to 30% more cars this year than last year, but the company just announced a two-week shutdown at its Fort Wayne, Indiana, plant because of a lack of computer chips.

According to experts, the supply chain disruptions aren’t going to resolve any time soon.

"We were looking at 2023 for things to get back to normal before the [Ukraine] crisis," Joe Terino, who leads management consultant Bain & Co.'s global supply chain practice, told CNN. "Now it's hard to say when it might end, because we don't know how long it will go, how far reaching it could become."

"We lived under the assumption that products, resources can move freely across geography," Hernan Saenz, who leads the global performance Improvement practice at Bain, told CNN. "When that's no longer true, it has massive implications. You can adapt in the long term but short-term, recovery is very painful."