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America’s prices surged in March

Wall Street has been a bundle of nerves about potential spikes in inflation since Democrats passed $1.9 trillion in economic stimulus last month. And on Tuesday, some of the first signs of inflation came to pass.

Consumer prices for March rose 2.6% compared to the same month last year. They were lifted in particular by surging energy prices, including the cost of gasoline — which jumped 22.5% over the last 12 months ending in March.

Excluding volatile gas and food prices, America’s consumer prices still rose 1.6% from the previous year, data from the Bureau of Labor Statistics revealed. That was more than economists surveyed by Refinitiv had predicted.

In March alone, consumer prices climbed 0.6%. That was more than expected, as well as the largest increase since August 2012.

Stimulus sugar rush or long-term inflation?

The question remains: Is this a temporary sugar rush from stimulus or the start of longer-term inflation that could eat into corporate profits? We don’t have those answers yet.

Last week’s report on producer price inflation, which measures the change in sale prices for goods and services, also came in above expectations.

Prices are rising as the economy is gathering steam. The great reopening fueled by the continuing vaccine rollout is helping to release some of the pent-up consumer demand.

But it’s important to note the context of the year-over-year comparisons, as prices pulled back significantly after the pandemic hit the US in March 2020 and shutdowns began.

Higher inflation is a good sign for the economic recovery. But investors worry that sudden price spikes will force the Federal Reserve to adjust its lose money policies sooner than hoped, which would be bad news for the stock market.

And because of the historical comparison, inflation will seem to rise rapidly into mid-year and add to the narrative that the Fed isn’t seeing the inflation risk. But prices increases will moderate in the second half of the year as historical comparisons will be more favorable, said Action Economics’ chief economist Mike Englund.

“The steep climb in year-over-year inflation into mid-year will add to the market narrative that the Fed may be under-appreciating upside inflation risks, though y/y gains will moderate into Q3 and Q4 as comparisons become easier.

The Fed has repeatedly said that inflation would need to run above its target of around 2% for a while, and that other factors, including a recovery of the labor market, were also key to changes in monetary policy.

Article Topic Follows: Money

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