Category: Economy

A sharp increase in mortgage interest rates is taking its toll on loan demand, especially refinances. Total mortgage application volume fell 8.1% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 4.50% from 4.27%, with points rising to 0.59 from 0.54 (including the origination fee) for loans with a 20% down payment.

“The jump in rates comes as markets moved to price in a much faster pace of rate hikes, as well as expectations of fewer MBS purchases from the Federal Reserve,” said Mike Fratantoni, the MBA’s chief economist. “MBA’s new March forecast expects mortgage rates to continue to trend higher through the course of 2022.”

As a result, applications to refinance a home loan, which are highly sensitive to weekly rate moves, fell 14% from the previous week and were 54% lower than the same week one year ago. The refinance share of mortgage activity decreased to 44.8% of total applications from 48.4% the previous week.

“The number of high-quality refi candidates was already down more than 75% through last week – these latest jumps will likely cut that population even further,” said Andy Walden, vice president of enterprise research at Black Knight. “But, while we are now seeing declines in overall lending activity, cash-out lock volumes continue to hold stronger than rate/term refis against rising rates. This will be an important market segment for lenders, particularly given the record $10 trillion in tappable equity available being padded even further by the still red-hot housing market.”

Mortgage applications to purchase a home, which are less sensitive to weekly rate moves, fell 2% for the week and were 12% lower than the same week one year ago. Economists are starting to revise their home sales forecasts lower, due to rising rates. The housing market is already expensive, as a supply-demand imbalance puts upward pressure on prices. Rising rates are weakening affordability even further.

While overall purchase application volume was down slightly, there was a larger drop in FHA and VA loan demand. These loans are popular with lower-income homebuyers.

“First-time homebuyers, who rely on these government programs, are increasingly challenged by both the rapid increase in home prices and higher mortgage rates,” added Fratantoni.

The average rate on the popular 30-year fixed mortgage hit 4.72% on Tuesday, moving 26 basis points higher since just Friday, according to Mortgage News Daily.

As a result of the recent spike in rates, economists are now lowering their home sales forecasts for this year.

Most estimates at the end of last year had the average 30-year mortgage rate hitting 4.5% by the close of 2022, but the war in Ukraine, rising oil prices and inflation have all lit a fire under interest rates. At this time in 2021, rates were about 3.45%

A shift in the policy outlook from the Federal Reserve, suggesting far more rate increases than expected, is pushing bond yields higher. The 30-year fixed mortgage loosely follows the yield on the 10-year U.S. Treasury, which is now at the highest level since May 2019.

“Rates have a small chance to top out before hitting 5% and a good chance of topping out before hitting 6%,” said Matthew Graham, chief operating officer at Mortgage News Daily. “It is a rapidly moving target in this environment, where we legitimately and unexpectedly find ourselves needing to be concerned with inflation for the first time since the 1980s.”

Economists had expected the rate to rise only slightly this year, but now that is changing.

Lawrence Yun, chief economist for the National Association of Realtors, now says he expects the rate to hover around 4.5% this year, after previously predicting it would stay at 4%. NAR’s latest official prediction is for sales to drop 3% in 2022, but Yun now says he expects they will fall 6%-8% (NAR has not officially updated its forecast).

The rise in rates comes on top of an already sizzling housing market. Demand remains strong, and supply remains historically low. This has pressured home prices, which were already up 19% in January year over year, the latest read from CoreLogic.

“That is a double whammy that erodes affordability for homebuyers, especially first-timers,” said Frank Nothaft, chief economist at CoreLogic. “First-time buyers are a sizable part of prospective shoppers and their share of purchases has slipped from one year ago. We will be revising our home sales forecast a bit lower.”

Home sellers may also be adjusting their expectations. Asking prices slipped slightly last week, according to Realtor.com, despite the competitive market.

“In a potential sign that sellers are mindful of buyers’ tightening budgets as mortgage rates climb, last week’s data showed the first slowdown in asking price growth since January,” wrote Danielle Hale, chief economist at Realtor.com.

Hale said she may revise her sales forecast lower as well but hasn’t yet. She points out that while rising costs could cut into home sales, there are several offsetting factors, such as rent.

“Fast-rising rents aren’t offering any relief and may keep some would-be buyers on the hunt for a home, so that they can lock-in the bulk of their housing costs before inflation raises the bar yet again,” said Hale. 

“Demographics are also favorable for the housing market this year, with more than 45 million households in the 26-35 age range, which are key years for household formation and first-time home buying. However, the economic considerations for those households are going to be challenging,” she added.

Federal Reserve Chairman Jerome Powell on Monday vowed tough action on inflation, which he said jeopardizes an otherwise strong economic recovery.

“The labor market is very strong, and inflation is much too high,” the central bank leader said in prepared remarks for the National Association for Business Economics.

The speech comes less than a week after the Fed raised interest rates for the first time in more than three years in an attempt to battle inflation that is running at its highest level in 40 years.

Reiterating a position the Federal Open Market Committee made Wednesday in its post-meeting statement, Powell said interest rate hikes would continue until inflation is under control. He said the increases could be even higher if necessary than the quarter-percentage point move approved at the meeting.

“We will take the necessary steps to ensure a return to price stability,” he said. “In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so. And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.”

A basis point is equal to 0.01%. FOMC officials indicated that 25 basis point increases are likely at each of their remaining six meetings this year. However, markets are pricing in about a 50-50 chance the next hike, at the May meeting, could be 50 basis points.

Stocks slipped to their lows of the session after Powell’s remarks while Treasury yields rose.

The sudden policy tightening comes with inflation as measured by the consumer price index running at 7.9% on a 12-month basis. A gauge that the Fed prefers still has prices up 5.2%, well above the central bank’s 2% target.

As he has before, Powell ascribed much of the pressures coming from Covid pandemic-specific factors, in particular escalated demand for goods over services that supply could not meet. He conceded that Fed officials and many economists “widely underestimated” how long those pressures would last.

While those aggravating factors have persisted, the Fed and Congress provided more than $10 trillion in fiscal and monetary stimulus since the pandemic’s start. Powell said he continues to believe that inflation will drift back to the Fed’s target, but it’s time for the historically easy policies to end.

“It continues to seem likely that hoped-for supply-side healing will come over time as the world ultimately settles into some new normal, but the timing and scope of that relief are highly uncertain,” said Powell, whose official title now is chairman pro tempore as he awaits Senate confirmation for a second term. “In the meantime, as we set policy, we will be looking to actual progress on these issues and not assuming significant near-term supply-side relief.”

Powell also addressed the Russian invasion of Ukraine, saying it is adding to supply chain and inflation pressures. Under normal circumstances, the Fed generally would look through those types of events and not alter policy. However, with the outcome unclear, he said policymakers have to be wary of the situation.

“In normal times, when employment and inflation are close to our objectives, monetary policy would look through a brief burst of inflation associated with commodity price shocks,” he said. “However, the risk is rising that an extended period of high inflation could push longer-term expectations uncomfortably higher, which underscores the need for the Committee to move expeditiously as I have described.”

Powell had indicated last week that the FOMC also is prepared to begin running off some of the nearly $9 trillion in assets on its balance sheet. He noted the process could begin as soon as May, but no firm decision has been made.

The Federal Reserve is poised to announce its first interest rate hike since 2018 on Wednesday.

The central bank is likely to raise its target federal funds rate by 25 basis points to address the worst inflation in more than 40 years, partially brought on by the coronavirus pandemic. A basis point is equal to 0.01%.

Yet consumers who are already grappling with higher prices putting a strain on their wallets may be wondering how increasing borrowing costs will help tamp down inflation.

The consumer price index soared to a 7.9% annual rate in February, the highest level since January 1982. Rising costs of items such as food and fuel drove the increase and further eroded any wage gains that workers may have seen in the last year.

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“This is something really hard for the typical consumer to understand, seeing these fast price raises that are so unfamiliar to large parts of our population who haven’t seen inflation rates like this before,” said Tara Sinclair, a senior fellow at the Indeed Hiring Lab. “And then trying to figure out the Fed’s complicated role in all of this is very confusing.”

Here’s what you need to know.

The Fed’s mandate

The Federal Reserve has a few main goals with respect to the economy: to promote maximum employment, keep prices stable and ensure moderate long-term interest rates.

Generally, the central bank aims to keep inflation around 2% annually, a number that lagged before the pandemic.

Its main tool to battle inflation is interest rates. It does that by setting the short-term borrowing rate for commercial banks, and then those banks pass rates along to consumers and businesses, said Yiming Ma, an assistant finance professor at Columbia University Business School.

That higher rate influences the interest you pay on everything from credit cards to mortgages to car loans, making borrowing more expensive. On the flip side, it also boosts rates on savings accounts.

Interest rates and the economy

But how do higher interest rates reel in inflation? They help by slowing down the economy, according to the experts.

“The Fed uses interest rates as either a gas pedal or a brake on the economy when needed,” said Greg McBride, chief financial analyst at Bankrate. “With inflation running high, they can raise interest rates and use that to pump the brakes on the economy in an effort to get inflation under control.”  

Basically, the Fed policymakers aim to make borrowing more expensive so that consumers and businesses hold off on making any investments, thereby cooling off demand and hopefully holding down prices.

There could also be a secondary effect of alleviating supply chain issues, one of the main reasons that prices are spiking right now, said McBride. Still, the central back can’t directly influence or solve that particular problem, he said.

“As long as the supply chain is an issue, we’re likely to be contending with outside wage gains,” which drive inflation, he said.

What the Fed wants to avoid

The main worry for economists is that the Fed raises interest rates too quickly and dampens demand too much, stalling the economy.

This could lead to higher unemployment if businesses stop hiring or even lay off workers. If policymakers really overshoot on rate hikes, it could push the economy into a recession, halting and reversing the progress it has made so far.

Treating inflation in the economy is like treating cancer with chemotherapy, said Sinclair of the Indeed Hiring Lab.

“You have to kill parts of the economy to slow things down,” she said. “It’s not a pleasant treatment.”

Of course, it will take some time for any action to affect the economy and curb inflation. That’s why the Federal Open Market Committee carefully watches economic data to decide how much and how frequently to raise rates.

There is also some uncertainty due to the war in Ukraine, which has also increased prices on commodities such as gas. The Fed will have to watch how the war is hampering the U.S. economy and act accordingly.

It might get worse before it gets better

When the Fed does lift rates, it’s also likely that people will see the downsides of those increases before any improvement on inflation, said Sinclair.

Basically, that means consumers may have to pay more to borrow money and still see higher prices at the gas pump and grocery store. That scenario is particularly tough on low-income workers, who have seen wages rise but not keep pace with inflation.

Of course, ideally the central bank would like to raise rates gradually so that the economy slows just enough to bring down prices without creating too much additional unemployment.

“They have to carefully walk that tightrope,” said Sinclair.

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Forecasters have raised their outlooks for a recession and boosted their inflation projection as the Federal Reserve faces the quandary of fast-rising prices and greater uncertainty from Russia’s invasion of Ukraine, according to the latest CNBC Fed Survey.

The probability of a recession in the U.S. was raised to 33% in the next 12 months, up 10 percentage points from the Feb. 1 survey. The chance of a recession in Europe stands at 50%.

Respondents debated whether the recent surge in commodity prices would prompt the Fed to hike rates faster because it adds to inflation or raise rates less because they reduce growth.

“The tax impact of higher commodities prices is likely to slow the pace of hiking more than the inflationary impact is to accelerate it,” wrote Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.

But Rob Morgan, senior vice president at Mosaic, wrote: “I expect six quarter-point rate hikes from the Fed in 2022. If CPI reaches 9% in the March or April report, the Fed might be pressured into a 50-basis point hike in May.”

The 33 respondents, who include fund managers, strategists and economists, forecast the Fed will raise rates an average of 4.7 times this year, bringing the funds rate to end the year at 1.4% and to 2% by the end of 2023. Nearly half of the respondents see the central bank hiking five to seven times this year.

The rate hike cycle is seen ending at a peak funds rate of 2.4%, about the Fed’s neutral rate. But half of all respondents believe the central bank may ultimately have to raise rates above neutral to get control of inflation.

Propelling the rate increases are forecasts for the consumer price index to peak at 8.5% in March, but gradually decline to finish the year at a still high 5.2%. That’s nearly a full percentage point higher than the February survey. The CPI in 2023 is forecast to rise a tamer 3.3%, a rate still above the Fed’s target.

“We might be on the cusp of the Fed raising rates at the same time there is a minus sign in front of GDP,” wrote Peter Boockvar, chief investment officer of Bleakley Advisory Group. “What an awful position to be in, but until inflation falls sharply, they have no choice but to carry on.”

While a recession is seen as a greater possibility than in February, it’s not the base case for most respondents. The average GDP forecast for this year slipped by 0.8 percentage point but remains at a slightly above-trend 2.8%. The GDP forecast for 2023 dropped by about a half a point from the last survey to 2.4%.

Inflation forecasts had already been high for this year, but Russia’s invasion of Ukraine has aggravated the situation with nearly 90% saying they boosted their 2022 inflation outlook because of the war. They added an average 0.8 percentage point to their inflation forecast. Sixty percent of respondents said they shaved the GDP forecasts due to the conflict, with an average of a half a point.

While inflation forecasts rose and growth outlooks declined, the outlook for stocks is relatively bullish. Respondents lowered their outlook for equities, but only 53% now say stocks are overvalued relative to the outlook for earnings and growth. That’s down from 88% a year ago, and the least bearish respondents have been since the Covid pandemic began.

Meanwhile, the CNBC Risk/Reward ratio (measuring the chance of a 10% correction verus the chance of a 10% increase in the next six months) improved to -9 from -14, meaning a negative correction is judged less likely. The outlook for the S&P 500 dropped to 4,431 this year, suggesting stocks could have 6% upside from the current level.

Another surge in energy prices pushed wholesale goods prices to their biggest one-month jump on record in February, according to Labor Department data released Tuesday.

Final demand prices for goods jumped 2.4% for the month, the largest move ever in data going back to December 2009, the Bureau of Labor Statistics said.

That pushed the headline producer price index up 0.8% on the month, which actually was slightly lower than the 0.9% Dow Jones estimate.

Excluding food, energy and trade services, so-called core PPI rose just 0.2%, well below the 0.6% expectation.

On a year-over-year basis, headline PPI rose 10%, the same as January and tied for the biggest 12-month move ever.

The data came during the week of Feb. 13, before the Russian invasion of Ukraine. Energy prices surged even more as the war began, and will show up in next month’s report.

The numbers coincide with most other inflation gauges running around 40-year highs, thanks to price increases that have spread beyond volatile gas and grocery prices and across a broad spectrum of consumer goods and services.

In response to the inflation trend, the Federal Reserve is expected on Wednesday to raise interest rates for the first time since December 2018.

“Producer prices are an early warning sign of what households can expect in terms of consumer price inflation,” wrote PNC economist Kurt Rankin. “The message is clear that consumer prices have several months of exceptional gains ahead of them still, despite the fact that the Fed is set to begin hiking its policy rate in March and continue to do so throughout the year.”

Gasoline was still the main story in February when it came to final demand prices.

Some 40% of the increase in wholesale goods prices came from gasoline, which rose 14.8%. Diesel fuel and electric power also helped feed an 8.2% increase in final demand energy prices, while motor vehicles and equipment and dairy prices also climbed. Various prices for food products, such as fresh and dry vegetables along with beef and veal showed declines.

The PPI is not as closely watched as the consumer price index, but wholesale costs feed into prices at the register and are seen as a harbinger of inflation.

Demand for single-family rental homes is soaring, pushing prices to record highs, as Americans continue to want larger homes with outdoor spaces.

Single-family rents gained a record 12.6% year over year in January, according to a new report from CoreLogic. That compares to an increase of 3.9% in January 2021.

Every major market saw increases, but cities in the Sun Belt saw truly stunning numbers.

For example, single-family rents soared 38.6% in Miami, up from just 2% the previous January. Orlando, Fla., and Phoenix were next in line, with gains of 19.9% and 18.9%, respectively, as Americans continued their migration to warmer parts of the nation. The Washington, D.C., area saw the lowest annual growth in rent prices — but they were still up 5.6%.

“Single-family-rent growth extended its record-breaking price growth streak to 10 consecutive months in January,” said Molly Boesel, principal economist at CoreLogic.

Demand for single-family rentals is so strong partly because the market for potential homebuyers is so tough. Not only are home prices up 19% from a year ago, but the number of listings are still historically low. That means homes that are listed often sell in a matter of weeks, if not days.

Rent growth is strongest in the middle of the market, according to the report. CoreLogic looked at four tiers of rental prices and found the weakest growth on the edges:

• Lower-priced (75% or less than the regional median): up 12%, compared with 3% in January 2021
• Lower-middle priced (75% to 100% of the regional median): up 13.3%, from 3.2% in January 2021
• Higher-middle priced (100% to 125% of the regional median): up 13.4%, from 3.6% in January 2021
• Higher-priced (125% or more than the regional median): up 12.2%, from 4.5% in January 2021

Apartment rents also are still rising, but the gains are moderating slightly, as more supply comes on the market to meet demand.

But the same is not true for the single-family rental market. While more builders and investors opt for build-for-rent projects, the available inventory is still on the low side, with building hampered by supply chain disruptions and the industry labor shortage.

Investors may take the Federal Reserve’s first post-pandemic interest rate hike in stride, while uncertainty over the Ukraine crisis continues to hang over markets.

The Fed has clearly broadcast that it intends to raise its target fed funds rate by a quarter percentage point from zero, and it is expected to announce that move at the end of its two-day meeting Wednesday. The central bank should also reveal new forecasts for interest rates, inflation and the economy.

There are a few economic reports of note in the week ahead, including the producer price index Tuesday, retail sales Wednesday and existing home sales Friday.

“Earnings are over. Monetary policy is obviously going to be important here. I don’t see the Fed surprising anyone next week,” said Steve Massocca, managing director at Wedbush Securities. “It’s going to be a quarter point and then step into the background and watch what’s happening in Europe.”

Stocks fell for the past week, with the Nasdaq Composite the worst performer with a 3.5% decline. Meanwhile, the small-cap Russell 2000, which outperformed the three major indexes, lost 1% for the week.

A surge in oil prices spooked investors, with crude spiking to $130 at the beginning of the week but trading back below $110 on Friday.

The S&P 500 was down about 2.9% for the week. Energy stocks were the top performers, up nearly 1.9% and the only positive major sector.

Fed ahead

The impact of Russian sanctions on commodities markets and the lack of clarity around the outcome of the war in Ukraine are likely to keep volatility high across the financial markets.

The central bank’s statement and comments from Fed Chair Jerome Powell on Wednesday will be closely watched for guidance on how central bank officials view the Ukraine crisis, and how much it could affect their outlook and the path for interest rates.

“His guidance is probably not going to be all that different from what he had to say in the [congressional] testimony. Basically, downside risks to the growth outlook have increased, upside risks to inflation have risen,” said Mark Cabana, head of U.S. short rates strategy at Bank of America.

Because Russia is a giant commodities producer, its assault on Ukraine and resulting sanctions have set off a rally in commodities markets that has made already-scorching inflation even hotter. February’s consumer price index was up 7.9%, and economists said rising gasoline prices could send it above 9% in March.

Gasoline at the pump jumped nearly 50 cents in the past week to $4.33 per gallon of unleaded, according to AAA.

Market pros see surging inflation as a catalyst that will keep the Fed on track to raise interest rates. However, uncertainty about the economic outlook could also mean the central bank might not hike as much as the seven rate increases that some economists forecast for this year.

Cabana expects Fed officials to forecast five hikes for 2022 and another four next year. The Fed previously anticipated three increases in both years. Cabana said the Fed could cut its forecast for 2024 to just one hike from the two in their last outlook.

Any comments from the Fed on what it plans for its nearly $9 trillion balance sheet will also be important, since officials have said they would like to begin to scale it back this year after they start hiking interest rates. The Fed replaces maturing Treasury bonds and mortgages as they roll off, and it could slow that in a process Wall Street has dubbed “quantitative tightening,” or QT.

“That they will be ready to flip the switch on QT in May is our base case, but we acknowledge there are risks that this will be skewed later,” said Cabana. He said if the Fed finds it is not in a position to raise interest rates as much as it hoped, it could delay shrinking the balance sheet right away, which would leave policy looser.

Bond market liquidity

The 10-year Treasury yield topped 2% at its highest level Friday, after dipping below 1.7% earlier this month as investors sought safety in bonds. Bond yields move opposite price.

“It’s inflation and inflation expectations. Treasurys behave in this environment a little differently than a flight to quality asset,” Cabana said “That’s a different dynamic than we’ve observed. You may see a flight to quality into Treasurys, but the Treasurys are reflecting higher inflation expectations.”

Cabana said the markets are showing signs of concern around the uncertainty in Ukraine. For instance, the Treasury market is less liquid.

“We have seen that the Treasury market has become more volatile. We’re seeing bid-ask spreads have widened. Some of the more traditionally less liquid parts of the market may have become less liquid, like TIPS and the 20-year. We’re also seeing market depth thinning out,” he said. “This is all due to elevated uncertainty and lack of risk-taking willingness by market participants, and I think that should worry the Fed.”

But Cabana said markets are not showing major stress.

“We’re not seeing signs the wheels are falling off in funding or that counterparty credit risks are super elevated. But the signs there are very much that all is not well,” he said.

“The other thing we continue to watch loosely are funding markets, and those funding markets are showing a real premium for dollars. Folks are paying up a lot to get dollars in a way they haven’t since Covid,” he said.

Cabana said the market is looking for reassurance from the Fed that it is watching the conflict in Ukraine.

“I think it would upset the market if the Fed reflected a very high degree of confidence in one direction or another,” he said. “That seems very unlikely.”

Dollar strength

The dollar index was up 0.6% on the week and it has been rising during Russia’s attack on Ukraine. The index is the value of the dollar against a basket of currencies and is heavily weighted toward the euro.

Marc Chandler, chief market strategist at Bannockburn Global Forex, also points out that the dollar funding market is seeing some pressure but it is not strained.

“The dollar is at five-year highs today against the yen. That’s not what you would expect in a risk-off environment,” he said. “That’s a testament to the dollar’s strength.”

Chandler said it’s possible the dollar weakens in the coming week if it follows its usual interest rate hike playbook.

“I think there might  be a buy the rumor, sell the fact on the Fed,” he said. “That’s typical for the dollar to go up ahead of the rate hike and sell off afterwards.”

Oil on the boil

Oil gyrated wildly this past week, touching a high not seen since 2008, as the market worried there would not be enough oil supply due to sanctions on Russia. Buyers have shunned Moscow’s oil for fear of running afoul of financial sanctions, and the U.S. said it would ban purchases of Russian oil.

West Texas Intermediate crude futures jumped to $130.50 per barrel at the beginning of the week but settling Friday at $109.33.

“I think the market getting bid up to $130 was a little premature,” said Helima Croft, head of global commodities strategy at RBC, noting the U.S. ban on Russian oil. She said the run-up in prices Monday came as market players speculated there would be a broader embargo on Russian oil, including Europe, its main customer.

“Right now, the market is too extreme in either way. I think it’s justified at $110. I think it’s justified over $100. I don’t think we’re headed for an off-ramp, and I think we have room to go higher,” she said.

Week ahead calendar

Monday

Earnings: Vail Resorts, Coupa Software

Tuesday

FOMC meeting begins

Earnings: Volkswagen

8:30 a.m. PPI

8:30 a.m. Empire State manufacturing

4:00 p.m. TIC data

Wednesday

Earnings: Lands’ End, Shoe Carnival, DouYu, Lennar, PagerDuty

8:30 a.m. Retail sales

8:30 a.m. Import prices

8:30 a.m. Business leaders survey

10:00 a.m. Business inventories

10:00 a.m. NAHB survey

2:00 p.m. Federal Reserve interest rate decision and economic projections

2:30 p.m. Briefing by Federal Reserve Chair Jerome Powell

Thursday

Earnings: FedEx, Accenture, Commercial Metals, Signet Jewelers, Dollar General. Designer Brands, Warby Parker

8:30 a.m. Initial jobless claims

8:30 a.m. Housing starts

8:30 a.m. Philadelphia Fed manufacturing

9:15 a.m. Industrial production

Friday

10:00 a.m. Existing home sales

2:00 p.m. Chicago Fed President Charles Evans

Inflation grew worse in February amid the escalating crisis in Ukraine and price pressures that became more entrenched.

The consumer price index, which measures a wide-ranging basket of goods and services, increased 7.9% over the past 12 months, a fresh 40-year high for the closely followed gauge, according to the Labor Department’s Bureau of Labor Statistics.

The February acceleration was the fastest pace since January1982, back when the U.S. economy confronted the twin threat of higher inflation and reduced economic growth.

On a month-over-month basis, the CPI gain was 0.8%. Economists surveyed by Dow Jones had expected headline inflation to increase 7.8% for the year and 0.7% for the month.

Food prices rose 1% and food at home jumped 1.4%, both the fastest monthly gains since April 2020, in the early days of the Covid-19 pandemic.

Energy also was at the forefront of ballooning prices, up 3.5% for February and accounting for about one-third of the headline gain. Shelter costs, which account for about one-third of the CPI weighting, accelerated another 0.5%, for a 12-month rise of 4.7%, the fastest annual increase since May 1991.

Excluding volatile food and energy prices, so-called core inflation rose 6.4%, in line with estimates and the highest since August 1982. On a monthly basis, core CPI was up 0.5, also consistent with Wall Street expectations.

The rise in inflation meant worker paychecks fell further behind despite what otherwise would be considered strong increases.

Real inflation-adjusted average hourly earnings for the month fell 0.8% in February, contributing to a 2.6% decline over the past year, according to the BLS. That came even though headline earnings rose 5.1% from a year ago, but were outweighed by the price surge.

Markets indicated a negative open on Wall Street, with stocks pressured by faltering Russia-Ukraine cease-fire talks. Government bond yields turned higher after the CPI report.

“Inflation is coming in hot but the reality is there are no real surprises in this report,” said Mike Loewengart, managing director of investment strategy for E-Trade. “The market likely already priced the inflation increase in accordingly, and is instead intently focused on Ukraine and the downstream impact from commodities, which are already sending shockwaves through the market.”

The inflation surge is in keeping with price gains over the past year. Inflation has roared higher amid an unprecedented government spending blitz coupled with persistent supply chain disruptions that have been unable to keep up with stimulus-fueled demand, particularly for goods over services.

Policymakers have been expecting inflation to abate as supply chain issues ease. The New York Fed’s supply chain index shows pressure has eased in 2022, though it is still near historically high levels.

Vehicle costs have been a powerful inflationary force but showed signs of easing in February. Used car and truck prices actually declined 0.2%, their first negative showing since September 2021, but are still up 41.2% over the past year. New car prices rose 0.3% for the month and 12.4% over the 12-month period.

A raging crisis in Europe has only fed into the price pressures, as sanctions against Russia have coincided with surging gasoline costs. Prices at the pump are up about 24% over just the past month and 53% in the past year, according to AAA.

Moreover, business are raising costs to keep up with the price of raw goods and increasing pay in a historically tight labor market in which there are about 4.8 million more job openings than there are available workers.

Recent surveys, including one this week from the National Federation of Independent Business, show a record level of smaller companies are raising prices to cope with surging costs.

To try to stem the trend, the Federal Reserve is expected next week to announce the first of a series of interest rate hikes aimed at slowing inflation. It will be the first time the central bank has raised rates in more than three years, and mark a reversal of a zero interest rate policy and unprecedented levels of cash injections for an economy that in 2021 grew at its fastest pace in 37 years.

However, inflation is not a U.S.-centric story.

Global prices are subject to many of the same factors hitting the domestic economy, and central banks are responding in kind. On Thursday, the European Central Bank said it was not moving its benchmark interest rate but would end its own asset purchase program sooner than planned.

In other economic news, jobless claims for the week ended March 5 totaled 227,000, higher than the 216,000 estimate and up 11,000 from the previous week, the Labor Department said. Continuing claims rose slightly to just below 1.5 million, though the four-week moving average remained at its lowest level since 1970.