People & Money

US January Inflation Rises To The Highest Level In 40 Years

The United States consumer price inflation surged to the highest level last seen since February 1982, amid the geopolitical tension that has caused an uptick in the prices of commodities.

According to data released by the US Labor Department, the Consumer Price Index (CPI), which measures the average price of goods and services purchased by households in the US, increased by 7.9% in February 2022 on a year-on-year basis.

Core inflation which excludes volatile items like food and energy prices from the Consumer Price Index hits 6.4% in line with economists’ expectations, while month-on-month inflation appreciated to 0.8%, surpassing analysts’ estimates of 0.7%.

The drivers behind price pressures

Over the past months, inflation rates in the USA have risen to levels last seen in decades with the February inflation rates coming in at 7.9% after surpassing the previous record two records of 7% and 7.5%.

In the past, the sporadic spike in prices of goods and services was mainly influenced by the supply deficits that couldn’t keep up with strong customer demand. However, the geopolitical crisis between Ukraine and Russia has exacerbated the pressure on commodities prices, as crude oil prices increased by 41% on a month-on-month basis.

Also Read: How Inflation Makes Poor Nigerians Poorer

Food prices have also skyrocketed as a result of disruptions in the global supply chain, adverse weather patterns, rising energy prices, heightened geopolitical tensions, and global sanctions. With Russia being the world’s top exporter of wheat and Ukraine as the world’s third-largest exporter of corn and the fourth-largest exporter of wheat, the effect of the war is being felt on these commodities as wheat prices increased by 68.05% and corn prices soared by 41.56% year-on-year.

Fuel, Food, and Rent contributed the most to the price increase in US inflation in 2022. Fuel was at the forefront of inflation, up by 3.5% in February alone. Meanwhile, rent accelerated by 4.7% over twelve months while food prices increased by 8.4% year on year.

The next step on policy front

The rising inflation level threatens the objectives of the US Federal Reserve (central bank) to maintain price stability and economic growth, as February inflation rates surged to 7.9% – a level unseen in 40 years.

While the Federal Reserve (the US central bank) adopted a wait-and-see approach on inflationary trends having labeled the price surge as “transitory,” implying that it will only have a short-term impact on the economy. The escalation of geopolitical tension between Russia and Ukraine contributed to the pressure on prices, especially with respect to crude oil and grains.

With February’s fresh 40-year high inflationary figure, the central bank officials think that the US Federal Reserve has met its mandate on employment and inflation, and hence would begin to tighten its monetary policy. As a result, it is glaring that Federal Reserve Chair Jerome Powell is prepared to hike interest rates to keep inflation under control and he has indicated that it might do so as soon as March 2022.

An interest rate hike in the United States will dictate the course of businesses, households, and financial markets.

Why You Should Care

The stock market is already being ravaged by geopolitical tensions, sanctions, and uncertainties on policy fronts with the S&P500 falling for the second straight week at 1.3%. The Dow Jones Industrial Average also fell 0.7% and Nasdaq fell 2.2% to close the market on Friday,11th of March 2022.

The expectations of a rate hike by the US Federal Reserve could also weigh on the financial market depending on how the geopolitical tensions play out, as a high-interest rate means a high borrowing cost for firms, which might affect corporate profitability. A fall in corporate profits would mean that future dividends given to investors will be reduced, which could prompt a change in investment decisions away from risky assets and toward lower-risk stocks that benefit from higher interest rates, such as financial companies.

As investors, traders and businesses brace for higher interest rates from the Federal Reserve amid a choppy market, we maintain that investors apply a more cautious approach to investing this year.

Yunus Ibrahim

Yunus advocates for mission-driven, underrepresented founders, particularly women, first-generation entrepreneurs, and people of colour. With over 3 years of experience in Venture Capital, ESG, Corporate Finance, and Research, Yunus has gained insights into various markets in Sub-Saharan Africa and worked with diverse founders to build the prosperous African continent we all desire. He received a bachelor's degree in Accounting from the University of Lagos; and was 1 of 60 African scholars selected to study Technology, Entrepreneurship, and Design at the Nigerian University of Technology and Management (NUTM) on a full-ride scholarship.

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