US inflation surges to 40-year high of 8.5% fuelled by rising petrol and food prices

US consumer price growth surpassed 8 per cent in March, rising at its fastest pace since 1981, following a surge in energy and food prices that stemmed from Russia's war on Ukraine.

The consumer price index rose 8.5 per cent last month compared with a year ago, marginally above Wall Street’s expectations, the Bureau of Labor Statistics said on Tuesday.

The monthly rise registered at 1.2 per cent, the fastest jump since September 2005 and a sharp acceleration from the 0.8 per cent increase recorded in February.

However, once volatile items such as food and energy are stripped out, "core" CPI advanced 0.3 per cent in March. That was the slowest rise since September, prompting a rally in Treasuries and overnight funding markets as traders bet that the Federal Reserve would not have to tighten policy as aggressively to stamp out inflation as previously thought.

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The data reflect the immediate aftermath of Russia’s invasion of Ukraine, which has dramatically clouded the global economic outlook and sparked concerns about slowing growth coupled with even more elevated price pressures.

The Biden administration on Monday blamed the surge in prices on the war, with White House press secretary Jen Psaki saying the CPI reading would be "extraordinarily elevated due to Putin's price hike".

Psaki noted petrol prices are up on average more than 80 cents a gallon since the invasion, which she said would drive the bulk of the increase.

Inflation expectations have in turn risen, with a new monthly survey released by the New York branch of the Federal Reserve on Monday showing that US households are bracing for costs to continue rising.

Over the next year, consumers anticipate inflation hitting 6.6. per cent, a 0.6 percentage point rise from the previous period. Expectations for the three-year outlook declined marginally but still remain elevated at 3.7 per cent.

Concerns that inflation will become even more deeply entrenched in the world’s largest economy have prompted the US central bank in recent weeks to assume a more aggressive approach to tightening monetary policy.

The Fed is now poised to raise interest rates by half a percentage point at its next policy meeting in May, double the pace of its March rate rise, as it seeks to lift its benchmark policy rate to a more “neutral” level that neither aids nor constrains growth by the end of the year.

Officials forecast that rate to be roughly 2.4 per cent, implying at least one more half-point adjustment in addition to four more quarter-point rate rises in 2022.

Traders on Tuesday lowered their own expectations for how high the Fed would raise interest rates this year to 2.49 per cent, down from 2.59 per cent earlier in the day.

The central bank is also set to begin shrinking its $9 trillion balance sheet next month, building up to as much as $95 billion a month over roughly three months beginning in May. - Copyright The Financial Times Limited 2022