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Economic Report: Ukraine war fans flames of hottest U.S. inflation in 40 years. Are prices going to cool down soon?

The steepest increase in U.S. inflation in 40 years was supposed to start to ease soon. Then the war in Ukraine happened.

The biggest conflict in Europe since World War Two has sent the cost of oil, wheat and many other commodities soaring. These price increases threaten to push the rate of U.S. inflation, already at a 40-year peak of 7.9%, even higher in the next few months.

Already:

The average cost of a gallon of gas has hit a record high.

Grocery prices are rising at the fastest pace since 1981.

New autos cost more than ever —if customers can find one.

Shelter costs are climbing at the biggest clip since 1991.

And the rate of increase in rents has more than doubled since last spring.

These price increases could push the rate of inflation above 8% in the short run, economists say. Some even suggest 9% is not out of the question.

“Given the recent surge in commodity prices, inflation is almost certain to rise further in the coming months,” said Jim Baird, chief investment officer at  Plante Moran Financial Advisors.

Just how high could inflation go? Economists say it’s unclear. No one knows how much oil prices will increase or how long they will remain sky-high.

The price of a barrel of West Texas crude on U.S. future markets shot up to $130.50 on Tuesday, double the cost vs. one year ago. It then fell a day later to $110, reflecting how volatile prices have become since the Russian attack.

The retail cost of gasoline, meanwhile, has jumped about 25% in 2022 to an average of $4.10 a gallon in the first week of March, according to the Energy Information Administration.

Assuming gas price stay high or keep rising through the next several months, it could raise the rate of inflation by a full percentage point, estimates Stephen Stanley, chief economist at Amherst Pierpont Securities.

“Such a move would likely be sufficient to generate a noticeably higher peak in the year-over-year advance and push off any deceleration for at least a few more months,” he said.

Ye he and other economists point out that oil spikes have typically proven short-lived. Prices tend to fall, often sharply, not long afterward.

Such as scenario is unlikely in the next several months, however.

For one thing, the the surge in oil prices began well before the war in Ukraine. A recovering economy and lower oil production in the aftermath of the pandemic have combined to drive prices sharply higher since last summer.

The fresh spike in prices has been propelled by the U.S. and Europe moving to curtail imports of Russian-produced fossil fuels as part of a broad palette of sanctions. Russia is the third largest oil producer in the world behind the U.S. and Saudi Arabia.

The conflict could go on for awhile, however, and the summer driving season always heralds an increase in gas prices as more Americans take to the road. Energy providers also have to switch from winter to summer fuel and that also feeds into higher gas prices.

Some analysts doubt oil prices will go much higher, though.

Even as the West switches to other source of petroleum, they say, the Russian oil is expected to find a home. China and other countries could buy the oil instead.

Other oil-producing regions such as the U.S. and OPEC countries could also fill in some of the gap.

The longer prices remain high, though, the more stress it will put on the U.S. and global economies.

Still, it would probably take another major surge in prices or a prolonged Ukraine conflict to do grave damage, economists say. They point out that fewer people are driving to work, households built up substantial savings during the pandemic and a tight labor market has boosted wages.

Consumers are still spending plenty of money — and that’s what drives the economy.

“We think it would take oil prices rising above $200 a barrel and remaining there to seriously risk triggering a recession,” said Michael Pearce, senior U.S. economist at Capital Economics.

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