US inflation at fresh 40-year high, weekly jobless claims rise after consumer price surges in February

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U.S. consumer prices surged in February, culminating in the largest annual increase in 40 years, and inflation is poised to accelerate further in the months ahead as Russia's war against Ukraine drives up the costs of crude oil and other commodities.

The consumer price index increased 0.8% last month after gaining 0.6% in January, the Labor Department said on Thursday.

In the 12 months through February, the CPI shot up 7.9%, the biggest year-on-year increase since January 1982. That followed a 7.5% jump in January and was the fifth straight month of annual CPI readings north of 6%.

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Economists polled by Reuters had forecast the CPI rising 0.8% and vaulting 7.9% on a year-on-year basis.

Inflation has way overshot the Federal Reserve's 2.0% target. The U.S. central bank is expected to start raising interest rates next Wednesday to stamp out inflation, with economists expecting as many as seven rate hikes this year.

Last month's CPI data does not fully capture the spike in oil prices following Russia's invasion of Ukraine on Feb. 24. Prices shot up more than 30%, with global benchmark Brent hitting a 2008 high at $139 a barrel, before retreating on Wednesday after reports that the United Arab Emirates would call on fellow OPEC members to boost production.

The United States and its allies have imposed harsh sanctions on Moscow, with President Joe Biden on Tuesday banning imports of Russian oil into the country. Russia is the world's second-largest crude oil exporter.

Gasoline prices in the U.S. are averaging a record $4.318 per gallon compared with $3.469 a month ago, AAA data showed.

According to David Kelly, chief global strategist at JPMorgan Funds in New York, if gasoline averaged close to $4.20 for the year, that would add over $1,000 to the expenses of the average household. The Russia-Ukraine war, which has also boosted prices of wheat and other commodities, is seen keeping inflation uncomfortably high into the second quarter.

"Our estimates suggest gasoline and natural gas prices are on track to add over 1 full percentage point or so to overall year-on-year prints in each month over the next ten months," said Kevin Cummins chief U.S. economist at NatWest Markets in Stamford, Connecticut.

Lower income households bear the brunt of high inflation as they spend more of their income on food and gasoline.

TIGHT LABOR MARKET

Inflation was already a problem before the Russia-Ukraine war, thanks to a shift in spending to goods from services during the COVID-19 pandemic. Trillions of dollars in pandemic relief fired up spending, which ran against capacity constraints as the coronavirus upended the labor market dynamics.

Excluding the volatile food and energy components, the CPI increased 0.5% last month after advancing 0.6% in January.

In the 12 months through February, the so-called core CPI raced up 6.4%. That was the largest year-on-year gain since August 1982 and followed a 6.0% increase in January.

Rising rentals and shortages of goods like motor vehicles are fueling the core CPI. Sharply declining coronavirus infections are also seen boosting demand for services including air travel and hotel accommodation, keeping inflation hot.

Before the Russia-Ukraine war, most economists had expected the annual core CPI rate to peak in March just above 6.5% and retreating in April as large increases from last spring started to drop out of the calculation.

"We still think that is the most likely outcome, but there is a risk that energy passthrough effects from the latest spike in oil prices will slow that process," said Lou Crandall, chief economist at Wrightson ICAP in Jersey City.

"Exactly how the Fed will balance the impact of higher oil prices on the inflation data against the 'energy tax' hit to incomes and real spending remains unclear."

Tightening labor market conditions will also contribute to higher inflation, despite monthly wage growth stalling in February. There were a near record 11.3 million job openings at the end of January. The jobs-workers gap was 4.8 million, accounting for 2.9% of the labor force.

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits increased 11,000 to a seasonally adjusted 227,000 for the week ended March 5, still at levels consistent with a tight labor market.

Economists had forecast 217,000 applications for the latest week. Claims have dropped from a record high of 6.149 million in early April of 2020.