U.S. Inflation Is Expected to Have Reached a New High

Excluding volatile energy and food prices, economists estimated consumer inflation rose at a 6.4% annual rate in February, up from 6% the prior month. The CPI measures what consumers pay for goods and services, including groceries, clothes, restaurant meals, recreation and vehicles.

Before the Ukraine crisis, economists and policy makers had been hoping for a peak in year-over-year inflation this spring as supply chains heal from pandemic-related disruptions and the Federal Reserve begins an expected series of interest rate increases next week. But the outbreak of war has supercharged prices for oil, wheat, and precious metals, threatening higher inflation for longer.

“We thought that inflation would come down, especially due to the untangling of the global supply chain, but we don’t know how what’s happening in Ukraine will re-tangle that,” said Joel Naroff, chief economist at Naroff Economics LLC.

Elevated inflation, prior to the war in Ukraine, was primarily driven by brisk demand for goods, shipping bottlenecks and shortages of supplies such as semiconductors. Fed officials were braced for a run of higher inflation to start the year, but recent trends have been higher than expected. Housing and food costs have risen sharply, and hints at moderating prices in the used-car market have been overshadowed by further disruptions in new automotive manufacturing.

Economic disruptions from Russia’s invasion of Ukraine and the global response could further stoke inflation, in part because Russia is a top global supplier of oil and natural gas. One rule of thumb, which Fed Chairman Jerome Powell referenced last week, holds that a $10-per-barrel increase in oil prices boosts overall U.S. inflation by 0.2 percentage point. Brent crude, the global oil benchmark, has increased by around $40 a barrel since the start of the year. Russia also is a major player in global markets for metals used in the production of cars and airplanes and for components in fertilizer, a big expense in food production.

Because of Russia’s role in global energy and other commodity markets, “we’re going to see upward pressure on inflation at least for a while,” Mr. Powell told the Senate Banking Committee last week.

Mr. Powell has said he expects the central bank to raise rates by a quarter percentage point at its March 15-16 meeting with additional increases to follow later in the year. The plan was formulated ahead of the Ukraine invasion.

“I do think it’s going to be appropriate for us to proceed along the lines we had in mind before the Ukraine invasion happened,” Mr. Powell said. “In this very sensitive time at the moment, it’s important for us to be careful in the way we conduct policy simply because things are so uncertain and we don’t want to add to that uncertainty.”

On Sunday, the nation’s average gasoline price surpassed $4 a gallon for the first time since 2008, according to AAA, which tracks retail prices daily. By Wednesday, prices had hit their highest level ever, unadjusted for inflation.

The surge in energy and commodity prices is the latest challenge for businesses that have had to test whether their customers are willing to pay higher prices for products and services.

John Merritt, vice president of Elaine Bell Catering in Napa, Calif., has been pleased to see the recovery of his business after a tough two years in which in-person events dried up and planning for the future seemed impossible. But the rising cost of labor and the lack of price stability for food and gas has hurt business.

“We’re able to pass some costs on to customers, but a lot of people were contracted at lower prices,” and rising costs have eaten up his profit margin, Mr. Merritt said.

To hedge against future price increases, Elaine Bell Catering has started to include an inflation rider in new contracts. “We’re giving them the best price we can if they were having their event today,” Mr. Merritt added. “But where we are booking things 18 months out commonly, we have to price this more like a long-term labor contract that has a CPI adjustment.”

Some economists believe that inflation is still likely to peak soon, perhaps as early as this month. But the war in Ukraine increases the chance that the peak will be higher, and the descent to lower levels will take longer, they say.

“Momentum on the supply-chain front is disrupted by the war,” said Kathy Bostjancic, chief economist at Oxford Economics. She has now raised her expectations for annual inflation at the end of 2022 to closer to 4% rather than 3%.

A primary worry for policy makers going forward is that higher wages will keep pressure on inflation by causing companies to raise prices to account for labor costs. Still, private-sector average hourly earnings rose a seasonally adjusted 5.1% in February from the previous year, lower than the rate of inflation.

Nitin Kumar, a Herndon, Va., resident who works at a financial technology company, was grateful to get a “substantial raise” at the beginning of 2022, but after seeing the rate of inflation, has questioned how far his money really goes. He is considering whether he should shop at a discount grocery store or take other cost-saving measures.

“I need to start considering things I can do myself—like walk more instead of driving,” Mr. Kumar said. “It’s not a sustainable practice to spend more.”

Write to Gabriel T. Rubin at [email protected]