Prices rose 9.1 percent in June, as consumers faced soaring costs for gas, food and rent, a higher-than-expected reading and bad news for Americans at a time when their wages are falling further behind the nation’s rising cost of living.
The new Consumer Price Index report released Wednesday contained particularly troubling signals for the Federal Reserve, showing that price pressures are so broad and persistent that they are difficult to control.
Overall, inflation is likely to ease in July as gas prices have fallen this month – a gallon of regular gas averaged about $5 in June and costs are now hovering around $4.63. But fuel prices are volatile, making it impossible to know whether current lower gas prices will persist, and the report suggested underlying inflationary pressures remained intense.
Notably, a core inflation index that excludes food and fuel prices to give an idea of the broad trend remained surprisingly high. That measure climbed 5.9 percent over the year through June, barely a slowdown from last month’s 6 percent rise. Core prices also rose 0.7 percent from May to June, ahead of the previous monthly increase.
Continued price increases predict trouble for President Biden, whose approval ratings have taken a hit amid rising costs, and may require continued strong action from the Fed. The central bank is raising interest rates to slow the economy and contain inflation, and it will likely continue to adjust policies quickly – even if this threatens to send the economy into recession – as inflation appears to be spiraling out of control. walk.
“It’s an ugly report,” said Julia Coronado, the founder of MacroPolicy Perspectives. “I don’t think there’s anything good about this report, as far as the Fed is concerned, as far as the US consumer is concerned.”
The global economy has been ravaged by a series of shocks that have pushed inflation up since the start of the pandemic. Factory closures and shipping shortages have shaken supply chains, and staff shortages are making it more difficult for airlines to fly at full capacity and for hotels to rent out rooms. The Russian invasion of Ukraine has disrupted gas and food supplies.
While economic policymakers initially hoped that the distortions would disappear and that prices would fall on their own, they have waited no longer, especially as price increases are proving not only pronounced but also widespread and increasing rapidly for a range of goods and services.
The Fed has been raising interest rates since March in an attempt to slow consumer and business demand in the hopes of cooling the economy and curbing inflation. The central bank has accelerated those interest rate movements as price increases have proved surprisingly persistent, and the new inflation report fueled speculation that the Fed might become even more aggressive.
Read more about oil and gas prices
Officials raised rates by 0.75 percentage points in June, the biggest step since 1994, and were expected to take a similar step at the meeting in late July. But after the new inflation data, investors started expect a percentage point move, based on market prices.
Fed officials themselves were hesitant to call for such a big move.
“My most likely stance is 0.75, because of the data I’ve seen,” Mary Daly, president of the Federal Reserve Bank of San Francisco, said in an interview Wednesday night. She explained that she had expected a high number, so the report didn’t bother her.
“I saw that data and thought, ‘This wasn’t good news, I wasn’t expecting good news,’” she said.
Ms Daly said she could see a situation where a larger increase of one percentage point could be possible if consumer inflation expectations got higher and consumer spending didn’t slow down.
Loretta Mester, president of the Federal Reserve Bank of Cleveland, told Bloomberg Television Wednesday night that the new inflation report was “uniformly bad” and there would be no reason to do less than the 0.75 points the Fed approved in June. But she also suggested keeping an eye on the incoming data and waiting to see how the economy evolved before deciding whether an even bigger move might be appropriate. The Fed’s next policy meeting is July 26-27.
Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, told reporters on Wednesday that “everything is in play,” but he also made it clear that he was “not tied to any specific course of action.”
Even a 0.75-point increase would be an unusually fast pace for a central bank that has tended to move gradually over the past few decades. The Fed risks sending the economy into recession because it raises interest rates quickly, because those increases could slow the economy so much that they terrify companies, causing them to stop hiring and start a chain reaction that leaves households behind. with less money to spend.
But policymakers believe they need to slow inflation quickly, even if that increases the likelihood of a painful slowdown. That’s because they fear that as inflation continues to be rapid, consumers and businesses may get used to it.
If people start demanding higher wages in anticipation of price increases — for example, by negotiating cost-of-living adjustments of 6 or 7 percent instead of the typical 2 to 3 percent — companies could try to pass on rising labor costs to customers by to raise prices. That could perpetuate rapid inflation, making it much more difficult for the Fed to stamp out.
“The path to price stability will involve some pain, but less pain if we do it than if we don’t,” Ms Mester said.
Inflation is currently high in much of the world, as the Russian invasion of Ukraine drives up food and fuel prices and transport and manufacturing problems leave some goods in short supply. But the new inflation report also shows evidence of price pressures that have little to do with global supply. Meals in restaurants, tickets to sporting events and other services are becoming more expensive.
For consumers, the new report is confirmation that it is becoming increasingly difficult to make ends meet. While wages are rising, they have not been able to keep up with the rapid price increases. After taking into account price increases, the average hourly wage has fallen by 3.6 percent in the past year.
At the same time, the supplies become more expensive. Food prices generally rose 10.4 percent in June from a year earlier, the largest annual increase since 1981. House or apartment rents also cost significantly more, as they have risen at the fastest monthly pace since 1986 .
That makes life difficult for many families. Rising housing costs have made it difficult for Elizabeth Haynes, 41, who lives with her husband in McKinney, Texas, to move. The couple wants to move to another state, but high housing costs have so far been prohibitive.
“We’re trying to get out of Texas, and it’s proving very difficult with the rent and the housing costs and the shortages and all that,” said Ms. Haynes, who hopes to find a place she can afford in Connecticut. “So that’s kind of our big pain point.”
As rapid price hikes tax many Americans, they also take their toll on economic confidence, posing a major challenge to Mr. Biden and Democrats in the run-up to the midterm elections. Mr Biden has acknowledged that inflation is causing pain and said in a statement on Wednesday it is “unacceptably high”.
But he also called the report “outdated” because it failed to reflect the recent drop in prices at the gas pump and other commodities. Democrats have suggested things will get better soon, pointing out that as fuel costs fall, overall inflation is likely to fall from June’s 9.1 percent.
“I think we’re at a peak — I think we’re going down from here,” House Speaker Nancy Pelosi said when asked for her response to the new data.
While there are hopes in Washington and Wall Street that inflation will fall sustainably, economists have repeatedly suggested that inflation has peaked in the past 12 months to see how it picks up again.
That’s partly because prices for certain goods have behaved strangely: cars are scarce and their prices have skyrocketed, for example. It’s also partly because economists have dismissed large price swings in various goods and services as temporary one-offs, and the surprises just kept mounting.
“People haven’t predicted car inflation very well,” said Jason Furman, an economist at Harvard. “In addition, inflation is about more than 10 individual stories about 10 individual goods and services — it’s about forces in the overall economy.”
That said, there are a few reasons why today’s rapid price gains could slow down based on the fundamentals of the economy.
Consumers may struggle to keep up with their spending as prices rise. If they move in with roommates, stop taking vacations, or withdraw from social activities to save money, supply may begin to catch up with demand, which could slow price increases.
Stores including Target trying to sell already inflated inventories, which could lower retail prices. The cost of goods, including sports equipment and televisions, is already starting to cool.
But for now, hints and forecasts of a cooling are unlikely to provide enough comfort for economic policymakers when there is little evidence of a concerted pullback starting.
“We have to be so humble in forecasting inflation,” said Blerina Uruci, an economist at T. Rowe Price, who expects inflationary pressures to ease. “We’ve just been so wrong, so consistent, in one direction.”
Reporting contributed by: Isabella Simonetti† Jim Tankersley† Emily Cochrane† Ana Swanson and Joe Rennison†