Inflation Accelerates in February as Energy Prices Jump, but Labor Market Indicators Remain Strong

Key Takeaways:

• The Consumer Price Index (CPI) increased 0.8 percent in February and 7.9 percent on an annual basis, the fastest in 40 years, according to the Bureau of Labor Statistics (BLS). Energy prices rose 3.5 percent over the month, led by a 6.6 percent jump in gasoline prices as oil prices increased. In part due to these higher oil prices, food at home prices rose 1.4 percent, their largest monthly gain since April 2020. Excluding food and energy, core prices rose 0.5 percent over the month and 6.4 percent annually, also the fastest rate since 1982. New vehicle prices increased 0.3 percent after being flat in January, while prices for used cars and trucks declined 0.2 percent. Shelter costs were up 0.5 percent over the month and 4.7 percent over the year, the fastest annual rate since 1991. Rent of primary residences increased 0.6 percent and owners’ equivalent rent (OER) was up 0.4 percent for the sixth consecutive month. On an annual basis, rent was up 4.2 percent and OER increased 4.3 percent. Prices in the travel/hospitality industry also increased, with airline fare up 5.2 percent and lodging away from home increasing 2.5 percent.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index declined 1.4 points to 95.7 in February, its lowest level since January 2021. Only 19 percent of firms on net reported plans to increase employment, a decline of 7 percentage points and also the lowest level since January 2021. On net, 68 percent of firms are raising average selling prices, an increase of 7 percentage points and a series record, while the percentage of firms raising worker compensation fell 5 points to 45. The net percentage of firms planning on raising selling prices and worker compensation in the future each ticked down 1 percentage point to 46 and 26, respectively. Twenty-six percent of firms rated inflation as their single most important problem, a record since the monthly survey started in 1986.
• The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings declined by 185,000 but remained at the second highest level in series history at 11.3 million in January, according to the BLS. Openings in leisure and hospitality fell 314,000 to 1.7 million while openings in manufacturing increased 109,000 to 855,000. Openings in construction increased by 21,000 to 380,000. Quits fell for the second consecutive month but remained elevated at 4.3 million.
• Consumer (non-mortgage) credit outstanding increased by $6.8 billion in January, according to the Federal Reserve Board. Revolving credit (largely credit cards) declined by $219 million, while non-revolving credit (largely auto and student loans) increased by $7.1 billion.
• The real goods U.S. trade deficit widened by $6.4 billion in January to a series record, according to the Census Bureau. Real exports dropped 3.9 percent while real imports increased 0.1 percent.

Forecast Impact:

The CPI print was largely in line with our expectations and is unlikely to significantly alter our forecast. However, rapidly rising food and energy costs, which together contributed nearly half of the month-over-month gain in February, are likely to be even higher in the March report given the recent surge in oil and agriculture commodity prices related to the Russian invasion of Ukraine. While there is a high degree of uncertainty regarding the conflict and its impact to our forecast, we are likely to upgrade our near- and medium-term inflation expectations based on three factors: 1. The recent jumps in oil prices and agriculture commodities plus the likelihood of higher demand for U.S. natural gas as Europe moves to decrease its dependence on Russian energy; 2. A slower pace or resolution for global supply chain disruptions, and; 3. The general inflationary effects from higher transportation and shipping costs. These higher inflationary pressures will weigh on real incomes, and, therefore, we expect them to weigh on demand. Combined with growing financial market volatility, we expect to downgrade our 2022 GDP outlook based on recent events.

Fortunately, however, unlike the high inflationary period in the late 1970s/early 1980s, the U.S. is currently experiencing one of the strongest labor markets on record, pointing to near-term resilience. While quits have fallen from their recent peaks, the level remains nearly 20 percent higher than the number of quits that occurred in January 2020, indicating workers are confident they can find new, likely better-paying jobs (a Pew research study showed 63 percent of workers who quit their jobs in 2021 cited low pay as a reason for leaving). That’s consistent with job openings remaining near record highs. Given high inflation and a strong labor market, we continue to expect the Fed to begin hiking rates at their meeting next week.

Although business optimism declined in February, we haven’t yet seen a major pullback in business activity from other indicators. Further, the NFIB survey hinted that some future inflationary pressures may be easing modestly, as businesses indicated fewer planned price and wage increases (however this data point preceded the Ukraine conflict).

Nathaniel Drake
Economic and Strategic Research Group
March 11, 2022

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