US inflation hits 8.5%

US consumer price inflation topped 8 percent in March, the fastest pace since 1981, after sharp increases in energy and food costs.

The consumer price index rose 8.5 percent last month from a year earlier, slightly ahead of Wall Street's expectations, the Bureau of Labor Statistics said on Tuesday. The monthly increase was 1.2 percent, the fastest increase since September 2005 and a sharp acceleration from the 0.8 percent increase recorded in February.

Excluding volatile items like food and energy, the "core" CPI rose 0.3 percent in March. This was the slowest increase since September but still represents an annual gain of 6.5 percent.

Lael Brainard, a Fed governor who is still awaiting Senate confirmation as the next vice chair, warned of "upside risks" to inflation, citing Russia's invasion of Ukraine pushing up energy and food costs , as well as new Covid-19 lockdowns in China that could tighten supply chain restrictions.

"The economy has now suffered a series of these types of inflationary shocks from external events," she said at a Wall Street Journal event. "We've seen a lot of resilience, but we've also seen very high inflation.

It was the first inflation reading to take a full month to reflect the impact of the war in Ukraine, which has significantly clouded the global outlook. Russia is one of the biggest Energy exporters of the world, and Russia and Ukraine are major suppliers of wheat and other grains

The weakening of the "core" CPI prompted a rebound in government bond and money markets as traders lowered their bets on the pace and magnitude of the Rate hikes have eased this year

, but markets still expect the Fed's interest rate to rise to 2.45% by the end of 2022, down from the previous day (2.59%) but well above the current range of 0.25% to 0.50%

The Biden administration on Monday blamed the war for the price rise, and White House press secretary Jen Psaki said the consumer price index was "extraordinarily high" due to Putin's price hike.

However, Joe Manchin, the moderate Democratic Senator from West Virginia, said Tuesday, "The Federal Reserve and the government did not act quickly enough, and today's data is a snapshot of the fallout being felt across the country."

He added that it was "a disservice to the American people to pretend inflation is a new phenomenon."

Manchin, who has blocked Biden's sweeping social spending plans on the grounds that they are inflationary, said bringing prices "under control will require more aggressive action" by the Fed and a change in energy policy on Capitol Hill.

"Everyone is worried about inflation," said Vincent Reinhart, a former senior Fed official who is now Mellon's chief economist. "She's number one in the polls. She's taking up the entire bandwidth of the Fed right now."

The numbers underscored the impact of volatile commodity prices, with the surge in gasoline prices accounting for more than half of March's overall CPI gain. Last year, prices at the pump rose 48 percent, including an 18.3 percent increase between March and February.

Excluding energy prices, core services price increases accelerated in March by 0.6 percent mom and 4.7 percent yoy. This is the largest monthly increase since August 1992.

However, there were signs of slowing down in price increases elsewhere. Used car prices, which have skyrocketed since the coronavirus pandemic pushed many Americans off public transportation, fell 3.8 percent in March. The cost of buying a new vehicle rose 0.2 percent month-on-month, a smaller increase from February.

Fears that inflation in the world's largest economy could become more entrenched have prompted the US Federal Reserve to tighten monetary policy more aggressively in recent weeks.

The Fed is now poised to hike interest rates by half a percentage point at its next meeting in May, doubling the pace of its March hike, aiming to raise its benchmark rate to a "neutral" level by year-end that is neither supportive nor supportive of growth inhibits.

Officials expect that rate to hover around 2.4 percent, meaning at least one more half-point adjustment in addition to four more quarter-point rate hikes in 2022.

The central bank will also soon begin reducing its $9 billion balance sheet by up to $95 billion a month for about three months.

Brainard said that process will start as early as June and, together with rate hikes, should bring Fed policy to more neutral levels "over time".

US Treasury bond prices rose on Tuesday, pushing the yield on the benchmark 10-year note down 0.06 percentage point to 2.72 percent. Stocks, which initially rallied after the data was released, fell, with the S&P 500 falling 0.3 percent in a volatile session.