Wage gains have outpaced inflation for nearly three years. The war could quickly change that

By Alicia Wallace, CNN

(CNN) — When contending with years of budget-breaking inflation, there was at least one saving grace: For the past 34 months, the average wage was growing faster than prices were.

That’s expected to change – in short order.

When the Consumer Price Index for March is released on Friday morning, it’s expected to show that US inflation bolted higher – a direct result of the Middle East war’s energy shock.

Economists are estimating that prices leapt 0.9% from February, more than triple the pace seen in January. Such an increase would drive the annual rate of inflation to 3.4% from 2.4%.

In one fell swoop, inflation could be back at a level not seen in nearly two years and Americans’ pay gains would be practically eaten away.

Last month, average hourly wage growth slowed to 3.5%, Bureau of Labor Statistics data showed.

“We’ll definitely see elevated prices eating away at people’s paychecks,” Elise Gould, a senior economist at the Economic Policy Institute, told CNN.

An abrupt increase with lasting impacts

The ceasefire reached earlier this week stemmed some fears that the conflict could drastically deepen or even come to a resolution sooner than later. However, uncertainty continues to linger as do the potential inflationary effects.

Even before the war, inflation was running higher than normal, kept elevated by tariff-related price hikes on goods as well as still-strong consumer demand, to a lesser extent, on services.

“Inflation pressures were already building before the war and are now intensifying,” Dean Baker, 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 aftershocks ripple beyond gas prices and permeate through a host of commonly purchased goods as well as some services.

Sharply rising gas and energy prices are expected to be the biggest contributor to March’s expected jump in inflation, Samuel Tombs, chief US economist at Pantheon Macroeconomics, told CNN.

Pantheon is expecting a 23% rise in gas prices, which would be the highest monthly increase on record for the index.

“There’s been bigger energy price shocks in total, but they’ve rippled through over several months,” he said. “This just came through in one month.”

If Pantheon’s math bears out, the increase in gas prices would account for more than two-thirds of the firm’s projected 1% monthly increase in the overall CPI.

It’s an abrupt increase on its own but one that comes with some legs.

“The energy price shock will take many months to play out to other parts of the economy,” Tombs said. “Goods prices won’t change immediately, but after three to six months, you tend to see energy price changes filter through to consumers.”

It’s not just oil

Still, some oil-related price hikes could show up immediately. The CPI data on airfares, for example, are drawn from bookings during the month, not necessarily the flights taken, he said.

Also, there may be some limited effects from companies imposing surcharges to cover higher transportation costs, said CEPR’s Baker. Those types of increases, however, will likely show up more in April’s data, he added.

But it’s not just oil. A choked-off Strait of Hormuz has interrupted a flow of critical materials, including fertilizers, aluminum and helium.

Rising fertilizer prices and higher transportation costs could hit hard at the grocery store, piling atop some increases that were already in the pipeline, Baker noted.

“[Food] prices were already rising rapidly at the wholesale level in February, even before the war,” he wrote. “A huge jump in fruit and vegetable prices was a main factor in the increase, likely connected to the loss of immigrant farm workers.”

While various price pressures are now being compounded by the effects of the war, at least one big contributor of inflation is moving in a welcome direction. Rents and housing-related inflation are continuing to slow, helping to keep a lid on some of the increases, Tombs said.

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