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Inflation hits another 40-year high. The war in Ukraine could make it worse

A sign shows the price of gas outside of a gas station as prices reach record highs, in Washington, DC, on March 8, 2022. - The AAA reported the average price of gas in the US on March 8 was $4.173 per gallon. US President Joe Biden announced a ban on US imports of Russian oil on Tuesday, in the administration's most far-reaching action yet to punish Moscow for invading Ukraine. (Photo by MANDEL NGAN / AFP) (Photo by MANDEL NGAN/AFP via Getty Images)
A sign shows the price of gas outside of a gas station in Washington, D.C, on March 8. Annual inflation is likely to have hit another 40-year high in February, yet the data won't fully capture the most recent surge in energy prices after Russia invaded Ukraine.

Annual inflation climbed to a new four-decade high in February, reaching alarming levels even before Russian troops moved into Ukraine, sending energy prices sharply higher.

The Labor Department said Thursday that consumer prices were 7.9% higher in February than a year ago. Prices rose 0.8% between January and February — an acceleration from the month before.

The annual inflation rate for February is the highest since January of 1982. It does not fully reflect the recent spike in gasoline prices, which climbed to an all-time high of $4.31 a gallon Thursday, following Russia's invasion of Ukraine.

Prices have been surging for months now, straining consumers' pocketbooks and putting added pressure on the Federal Reserve to clamp down.

"We're good at stretching the minute dollars we have, but we're feeling the breaking point," says Cami Bencomo, who runs a coffee delivery business with her husband in Las Cruces, N,M.

"By the time I told him to get gas, the price had already risen," Bencomo says.

Gasoline prices have jumped 59 cents a gallon in just the last week, according to AAA. Diesel prices have jumped even more sharply, to nearly $5.06 per gallon.

"There's no understanding of how far up the prices are going to go," Bencomo says. "We can stay home for a lot of stuff, but we have to have gas to deliver coffee. We have to have gas to get food."

Paychecks don't stretch as far as they used to

Rising food and fuel prices have been among the big drivers of inflation in the last year.

Gasoline prices accounted for nearly a third of the monthly price hike in February, following a drop in gas prices the month before during the omicron wave of the pandemic. Grocery prices rose 1.4% last month and 8.6% over the last year.

Kim Gonzalez, a medical assistant in Livingston, Mont., says her paycheck doesn't stretch as far as it used to.

As grocery prices rose, she started substituting generic cereal for the Honey Bunches of Oats she likes. But there's no substitute for pricey gasoline. And Gonzalez's 1999 Toyota Tacoma pickup gets only 16 miles to the gallon.

"Here it's helpful to have a vehicle that has four-wheel drive because we do get the snow," Gonzalez says. "Those types of vehicles are not always the most fuel-efficient."

Fed faces a tricky balance on the economy

The Fed has already telegraphed its plan to start raising interest rates when policy makers gather next week.

But the war in Ukraine adds a new layer of uncertainty. Soaring gasoline prices are likely to push inflation even higher in the coming months. But they could also leave consumers with less money to spend elsewhere, slowing economic growth.

"Right now, we need to move away from very low interest rates," Fed Chair Jerome Powell told a Senate committee last week. "The economy is very strong. Unemployment is low. Wages are going up. The labor market is quite healthy, and inflation is all too high."

The Fed has little margin for error as it tries to tame inflation without pushing the economy into recession.

"Given the current situation, we need to move carefully and we will," Powell told a House committee. "We will use our tools to add to financial stability, not to create uncertainty."

Watching every dollar spent

Powell said he expects the initial rate increase will be modest: one quarter of one percent. But he and his colleagues on the rate-setting committee are prepared to take stronger action in the coming months if necessary.

"Those of us on the committee have an expectation that inflation will peak and begin to come down this year," Powell said. "And to the extent that inflation comes in higher or is more persistently high than that, then we would be prepared to move more aggressively."

The impact of inflation falls hardest on those with lower incomes, who often have to make tough choices about what to do without, even as wealthier Americans have continued to spend freely. That spending has prolonged the mismatch between robust demand and limited supply that sent prices climbing rapidly.

Bencomo, who has a two-year-old daughter and another baby on the way, says she feels the pinch of rising prices, and has to manage her monthly budget carefully.

"If we weren't watching every dollar the way we are, I'm sure we would be — like many families — blowing through it and wondering in week four what are we going to do? How are we going to make this work." Copyright 2022 NPR. To see more, visit https://www.npr.org.