US inflation at its highest since 1981

US inflation has climbed to 8.5 per cent, the highest level since 1981, worsening an already major political problem for Joe Biden.

Americans paid more for fuel, food and other essentials last month amid an ongoing wave of record inflation. Picture: Stefani Reynolds/AFP

US inflation has climbed to 8.5 per cent, the highest level since 1981, worsening an already major political problem for Joe Biden and paving the way for a double whammy interest rate increase by the Federal Reserve within weeks.

A near 20 per cent jump in the price of petrol in March, as Russia’s invasion of Ukraine pushed the global oil price well above $US130 a barrel, saw consumer prices rise 1.2 per cent in March, among the sharpest monthly rates of increase in decades.

The new inflation figures came shortly before New Zealand’s central bank raised its benchmark interest rate by 50 basis points, the fourth consecutive rate rise.

The Reserve Bank of New Zealand had raised rates by 25 basis points in October, November and February – the cash rate now stands at 1 per cent.

“A larger move now also provides more policy flexibility ahead in light of the highly uncertain global economic environment,” the RBNZ said in a statement.

The bank had slashed its cash rate to a record low of 0.25 per cent early in the Covid-19 pandemic.

But the rapid increase in the official cash rate risks a sharp slowdown in the economy, which is already facing headwinds from weak consumer and business confidence, Chinese pandemic control policies and from the Russian war in Ukraine.

In the US, Kathy Bostjancic, economist at Oxford Economics, said the Russia-Ukraine war had added “further fuel to the blazing rate of inflation via higher energy, food and commodity prices that are turbocharged by a worsening in supply chain problems”.

The annual rate of US inflation has been above 5 per cent every month since May last year, rising to a peak of 7.9 per cent in February, ahead of the latest March record, as price increases spread across a greater range of goods and services, creating a political and economic crisis.

So-called core inflation – which strips out food and energy items – rose 6.5 per cent over the 12 months to March, the highest annual pace since August 1982, up from 6.4 per cent a month earlier and more than three times the rate of inflation the Federal Reserve is supposed to ensure.

Mr Biden, whose approval rating has been declining for months amid growing public disquiet about inflation, has sought to deflect blame for rising prices to Russia, profiteering by large businesses, and the Federal Reserve, which is tasked with keeping inflation at 2 per cent. Mr Biden’s pick for vice-chairman of the Federal Reserve, Lael Brainard (whose appointment is still awaiting confirmation by the Senate), said inflation was “too high” at a Wall Street Journal summit on Tuesday. “Getting inflation down is going to be our most important task,” she said.

Andrew Hunter, senior US economist at Capital Economics, said the US Federal Reserve, which has pencilled in as many as seven interest rate increases this year, was becoming “more hawkish by the day”.

“Having been slow to realise that the initial surge wasn’t transitory, Fed officials are now being a bit too pessimistic about how quickly inflation will drop back,” he said. “The March data won’t change their plans to up the pace of rate hikes to 50 basis points per meeting from next month.”

Prices in financial markets on Tuesday suggested investors put the chance of a 0.5 percentage-point increase in the funds rate, the key US interest rate, at 90 per cent, up from about 80 per cent a week ago. The Fed increased the official rate to 0.5 per cent last month.

The White House had warned inflation would be “extraordinarily elevated”, seeking to manage expectations on a topic that surveys show is the No.1 political problem for the Democrats in a midterm election year.

Some analysts said March was likely to be the peak for inflation, as energy prices began to unwind, pointing to a 0.3 per cent increase in core inflation in the month, the first time it had surprised economists by its weakness since ­August last year.

US consumers expect inflation to be 6.6 per cent in March this year, falling to 3.7 per cent by March 2025, according to a survey published by the New York Federal Reserve on Monday.

The latest inflation record comes amid strong growth in employment across the US: the jobless rate fell to 3.6 per cent in March, returning to the February 2020 level, before the pandemic.

Janus Henderson investors research director Matt Peron said there was “not much to like” in the US inflation figures.

“The best you can say is that core (inflation) came in lower than expected,” he said.

“That might give some relief to markets which were preparing for the worst. The key now is whether inflation has peaked, and if so, at what pace will it decline.”