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Inflation climbed to a new four-decade high last month.

STEVE INSKEEP, HOST:

Inflation climbed to a new high last month, the highest in decades, and that's before most of the recent spike in gasoline prices. The Labor Department gives us this information. They say that consumer prices were 7.9% higher in February than they were the year before, the sharpest increase since 1982. NPR's Scott Horsley joins us now. Hey there, Scott.

SCOTT HORSLEY, BYLINE: Good to be with you, Steve.

INSKEEP: What's driving the increase?

HORSLEY: Well, here's the scary thing. You know, gas prices accounted for almost a third of the price increase we saw between January and February. Gas prices had actually dipped a bit in January when the omicron wave was peaking and people weren't driving as much. But this February snapshot doesn't include most of the jump in pump prices that we've seen in recent days, since Russia invaded Ukraine. AAA says gas prices hit a new all-time high this morning, close to 4.32 a gallon, but most of that increase has come just in the last week, meaning after these February inflation numbers were calculated.

INSKEEP: OK, so there was enough increase in the gas prices to drive some of that 7.9% in overall inflation. What else?

HORSLEY: Yeah, inflation was pretty widespread last month. The monthly jump in grocery prices in February was the biggest we've seen since the early months of the pandemic. Over the last year, grocery prices have climbed 8.6%. Rent is also a significant factor in last month's inflation rate. And really, we're seeing price hikes in most parts of the economy. Furniture prices are up. Tickets to sporting events are up. Airfares are climbing as the health outlook has improved and more people feel free to travel. The jump in prices between January and February was actually bigger than the two previous months. So instead of cooling off, inflation appears to be heating up.

INSKEEP: Is there some underlying problem that's driving this inflation across the economy?

HORSLEY: There is. We still have a mismatch between consumer demand, which is really strong, and supply, which has been slow to bounce back from the pandemic. That is certainly true in the oil market. Oil was already in short supply, and of course, the war in Ukraine and the resulting sanctions have exacerbated that. But all sorts of businesses are having trouble finding enough people and enough raw materials to make the things that consumers are demanding. And consumer demand continues to be very robust. That's a recipe for rising prices.

INSKEEP: OK, this is the circumstance where the Federal Reserve would normally rise - raise interest rates, and they're, in fact, expected to do so. How's that going to affect things?

HORSLEY: Well, think about it. For the last couple of years, ever since the pandemic started, the Fed has kept interest rates close to zero in an effort to prop up the economy and put people back to work. Now, with inflation this high, we're going to see a shift. The Fed is going to start raising interest rates next week, most likely by a quarter percentage point. That won't do much to address the supply crunch. It won't put more gasoline on the market, for example. But over time, it should start to tamp down consumer demand.

The Fed is also hoping that supply chains will start to come untangled and that the supply-demand imbalance will ease over the coming year. But the war in Ukraine has added a new wrinkle to this. The war is already pushing up prices for energy and grain, since Russia and Ukraine are big suppliers. It also has the potential, though, to slow economic growth. You know, if people are spending more at the gas station, they'll have less to spend on everything else. So what was already going to be a tricky balancing act now gets even trickier, as policymakers try to cool off inflation but not go so far as to tip the economy into recession.

INSKEEP: The war becomes its own supply chain disruption. Scott, thanks.

HORSLEY: You're welcome.

INSKEEP: NPR's Scott Horsley. Transcript provided by NPR, Copyright NPR.

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