The Consumer Price Index report released yesterday showed inflation’s highest levels since 1981.

What’s the big deal? March was the first full month since the Ukraine invasion disrupted global supply chains — which sent commodity and food prices soaring.

The war on Ukraine had a significant impact on gasoline prices which made up half the monthly increase.

• Monthly view: Inflation increased 1.2% in March compared to the month before — higher than forecasts.
• Full-year view: Inflation rose 8.5% over the past 12 months.

But what happens when we exclude gas prices from the count?

It looks much better: Core inflation — which excludes volatile food and energy prices — increased 0.3% in March compared to the previous month.

Markets briefly jumped on the prospect of lower inflation — but the market excitement was short-lived — as major US stock indexes finished negative for the day.

Per a Capital Economics Senior US Economist, “core price pressures finally appear to be moderating” — signaling a peak in inflation (CNBC). Factors impacting inflation:

• Airline fares jumped 10.7% in March from the month before and service costs rose 5.1% from a year ago.
• Used car prices fell 3.8% in March — helping bring down inflation.

Unfortunately, our actual earnings — which are only up 5.6% from a year ago — are still struggling with inflation.

Looking forward: Inflation is still significantly higher than the Fed’s 2% target — building the case for the Fed to aggressively raise interest rates this year.

So far, the market is pricing in three 0.50% rate increases this year — with the first likely coming in May. But if demand for goods falls, the Fed may not need to increase interest rates as aggressively, per Bloomberg economists (BBG).

High inflation or higher interest rates? Pick your poison.