In fact, the header gives the exact detail that lies within the data. We got the last inflation data before the rise of oil with the last crisis. As such, there is an inflation that continues to hover at the peaks of 40 years, with an annual increase of 7.9%. The situation in inflation indicators shows periodic increases of 0.8% in the headline and 0.5% in the core. The annual increase in core inflation was realized as 6.4%. Global price pressures, which became more evident after Russia's invasion of Ukraine, will multiply this effect in the following months.
If we look at the sub-items; Increases in gasoline, housing and food indices made the biggest contribution to the increase in all seasonally adjusted items. The gasoline index rose 6.6% in February, accounting for almost a third of the monthly increase in all items. The food index increased by 1%; Biggest monthly increase since April 2020. The energy index rose 25.6% and the food index 7.9% year-on-year, the biggest increase in 12 months since the period ended in July 1981. A wide array of indices including entertainment, household goods, motor vehicle insurance, personal care and airline fares also contributed, while the housing index was the largest factor in the increase.
Inflation is on a broad-based rise. Goods inflation also contributes greatly to service and demand inflation, and at this point, price movements stemming from the oil shock will activate the input element in some of the cooled items and cause general price increases in the coming months. Therefore, the acceleration of inflation was problematic and the problem got bigger and bigger. The uncertainty caused by the Ukraine crisis is the biggest reason for this. The current break in supply chains is the main cause of inflation in and before February. We will not see a partial cooling as the new effect of geopolitical developments in Europe will cause inflation to settle above the 8% band and will disable the base effects of the last year.
Shortage of supply and inflationary pressures will continue to restrain growth. This is a phenomenon that could be exacerbated by the continued rise in commodity prices, such as energy costs. Since the growth in the industry was observed in the indicators before the Russian invasion of Ukraine, it is necessary to observe the effect of the new components. However, it is necessary to read this not from the shock effect, but from the wide spread.
The moderate response of the economy to the risk of war-induced supply shocks, which is effective on a global basis, opens up the Fed's room for action in terms of focusing on the reality of inflation. Retrospective indicators will be a little insignificant, new directions and projections should be taken as a basis. Powell made it clear to the markets that the FOMC would likely raise rates by 25 basis points at its March meeting and then continue gradually due to the uncertainty brought on by the war. Being less dependent on Russian conditions than in Europe increases the Fed's margin of right in this regard and allows it to act against inflation. War conditions are risky, but interest rates close to zero are not sustainable, as the growing fear of oil inflation makes it difficult to manage expectations. For this reason, the Fed will increase interest rates and continue on its path, while paying attention to a suitable momentum.
The risk of recession is on the table due to the global impact of an oil shock, just like in the 70s. Since the risks are not related to only one variable, it is more accurate to evaluate within the framework of the stagflation effect.
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