Annual inflation climbed to a new four-decade high in February, reaching alarming levels even before Russian troops moved into Ukraine, sending energy prices sharply higher.

The Labor Department said Thursday that consumer prices were 7.9% higher in February than a year ago. Prices rose 0.8% between January and February — an acceleration from the month before.

The annual inflation rate for February is the highest since January of 1982. It does not fully reflect the recent spike in gasoline prices, which climbed to an all-time high of $4.31 a gallon Thursday, following Russia's invasion of Ukraine.

Prices have been surging for months now, straining consumers' pocketbooks and putting added pressure on the Federal Reserve to clamp down.

"We're good at stretching the minute dollars we have, but we're feeling the breaking point," says Cami Bencomo, who runs a coffee delivery business with her husband in Las Cruces, N,M.

"By the time I told him to get gas, the price had already risen," Bencomo says.

Gasoline prices have jumped 59 cents a gallon in just the last week, according to AAA. Diesel prices have jumped even more sharply, to nearly $5.06 per gallon.

"There's no understanding of how far up the prices are going to go," Bencomo says. "We can stay home for a lot of stuff, but we have to have gas to deliver coffee. We have to have gas to get food."

Paychecks don't stretch as far as they used to

Rising food and fuel prices have been among the big drivers of inflation in the last year.

Gasoline prices accounted for nearly a third of the monthly price hike in February, following a drop in gas prices the month before during the omicron wave of the pandemic. Grocery prices rose 1.4% last month and 8.6% over the last year.

Kim Gonzalez, a medical assistant in Livingston, Mont., says her paycheck doesn't stretch as far as it used to.

As grocery prices rose, she started substituting generic cereal for the Honey Bunches of Oats she likes. But there's no substitute for pricey gasoline. And Gonzalez's 1999 Toyota Tacoma pickup gets only 16 miles to the gallon.

"Here it's helpful to have a vehicle that has four-wheel drive because we do get the snow," Gonzalez says. "Those types of vehicles are not always the most fuel-efficient."

Fed faces a tricky balance on the economy

The Fed has already telegraphed its plan to start raising interest rates when policy makers gather next week.

But the war in Ukraine adds a new layer of uncertainty. Soaring gasoline prices are likely to push inflation even higher in the coming months. But they could also leave consumers with less money to spend elsewhere, slowing economic growth.

"Right now, we need to move away from very low interest rates," Fed Chair Jerome Powell told a Senate committee last week. "The economy is very strong. Unemployment is low. Wages are going up. The labor market is quite healthy, and inflation is all too high."

The Fed has little margin for error as it tries to tame inflation without pushing the economy into recession.

"Given the current situation, we need to move carefully and we will," Powell told a House committee. "We will use our tools to add to financial stability, not to create uncertainty."

Watching every dollar spent

Powell said he expects the initial rate increase will be modest: one quarter of one percent. But he and his colleagues on the rate-setting committee are prepared to take stronger action in the coming months if necessary.

"Those of us on the committee have an expectation that inflation will peak and begin to come down this year," Powell said. "And to the extent that inflation comes in higher or is more persistently high than that, then we would be prepared to move more aggressively."

The impact of inflation falls hardest on those with lower incomes, who often have to make tough choices about what to do without, even as wealthier Americans have continued to spend freely. That spending has prolonged the mismatch between robust demand and limited supply that sent prices climbing rapidly.

Bencomo, who has a two-year-old daughter and another baby on the way, says she feels the pinch of rising prices, and has to manage her monthly budget carefully.

"If we weren't watching every dollar the way we are, I'm sure we would be — like many families — blowing through it and wondering in week four what are we going to do? How are we going to make this work?"

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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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