Small figurines are seen in front of displayed word "Inflation", U.S. flag and rising stock graph in this illustration taken February 11, 2022.
Small figurines are seen in front of displayed word "Inflation", U.S. flag and rising stock graph in this illustration taken February 11, 2022. Reuters / DADO RUVIC

Russia's invasion of Ukraine has dashed any hope U.S. consumers might have had for relief from sky-rocketing inflation, with gasoline prices in the last week surging by the most in nearly 17 years and costs of other goods like food ready to march higher as well.

Even before the invasion, the U.S. inflation report for February was set to show prices rising at their fastest pace in 40 years. The data, due to be released on Thursday, will likely show only a preliminary impact from the swelling in U.S. oil prices, which briefly climbed above $130 a barrel on Monday, but the spike is expected to drive overall inflation higher in coming months.

"There had been expectations that February would be the high point for year-over-year headline inflation, but the Ukraine shock is already sending gas prices higher in March," said Tim Duy, an economist at SGH Macro Advisors.

The development also comes at a perilous time for the Biden administration, already under fire for soaring costs for rents, electricity and food as the economy grapples with the impact of the COVID-19 pandemic, in which demand has outstripped supply.

Federal Reserve policymakers will also be keenly watching the reading, which will arrive just under a week before they gather for their next policy meeting. The U.S. central bank is widely expected to raise its benchmark overnight interest rate by a quarter of a percentage point on March 16 as it begins a tightening cycle meant to bring down inflation without derailing the economic expansion.

Fed Chair Jerome Powell said last week that the central bank will act cautiously given the uncertainty of the impact of the war in Ukraine, but persistently high inflation will weigh as policymakers sketch out their forecasts at their meeting for the path of rate hikes in the months ahead.

Economists polled by Reuters forecast the Consumer Price Index to have climbed 7.9% on a year-on-year basis in February, up from 7.5% in January. The monthly rate is forecast to have risen 0.8% after increasing 0.6% in the prior month.

Gasoline prices increased nearly 6% in February, which would add around 0.2 percentage point to the headline number last month, but the bigger effects are still to come.

The average U.S. price for regular unleaded gasoline on Monday was $4.065 a gallon, according to automobile club AAA, only about 5 cents shy of the record high. The increase over the last week of about 45 cents a gallon was the largest since 2005, it said.

Russia is the world's biggest exporter of oil and gas and a mooted ban on oil imports from that country pushed the price of Brent crude briefly above $139 a barrel on Monday.

By Oxford Economics' estimates, the surge in oil prices would add around 0.6 percentage point to the March inflation reading, but that could be easily outstripped in the coming months.

Powell said last week that the Fed estimates as a rule of thumb that every $10 increase in the price of oil adds 0.2 percentage point to inflation and subtracts 0.1 percentage point from economic growth.

Investment banks say crude prices could approach $200 a barrel this year if Russian supply evaporates, with dire consequences for the global economy.


This week's inflation reading could show a temporary softening in food inflation in February compared to January, but any let-up is set to be short-lived.

A pickup in demand for hospitality services as the economy rebalances after the disruption from the Omicron variant of COVID-19 could drive services prices higher, including for restaurants and other food-away-from-home categories, economists at Barclays noted, while the worsening war in Ukraine will now also disrupt supply chains.

Russia and Ukraine export more than a quarter of the world's wheat and Ukraine is a major corn exporter. Supply chain disruptions could add between 0.2 to 0.4 percentage point to headline inflation in developed economies in the next few months, according to Capital Economics, with higher costs for food-at-home categories persisting through the year.

All of it could add up to the Fed's nightmare scenario of inflation expectations becoming unanchored just as the central bank is being blown off course from the faster pace of rate hikes that were anticipated before the Russian invasion.

"The tentative peaking of inflation expectations could be at risk, with this oil price shock possibly spilling over into higher inflation expectations in the coming months," Deutsche Bank economists said. "Along with a broadening of price pressures and a tight labor market leading to accelerating wages, a renewed rise in inflation expectations could add to concerns that elevated inflation pressures are likely to prove to be far more persistent."