Inflation hits another 40-year high. What does that mean for shoppers and the next Fed rate hike?
Inflation jumped again in June on a persistent climb in gas, food and rent costs, notching another 40-year high and likely solidifying the Federal Reserve’s plans for another big rate hike this month.
Prices increased 9.1% from a year earlier, up from an annual rate of 8.6% the prior month and the largest gain since November 1981, the Labor Department's Consumer Price Index showed Wednesday. Economists surveyed by Bloomberg had estimated inflation would rise to 8.8%.
On a monthly basis, consumer prices increased 1.3%, the largest such leap since 2005, compared with a 1% rise in May.
"Ouch," Ian Shepherdson, chief economist of Pantheon Macroeconomics, wrote in a research note of the latest surge in prices. "But this will be the last big increase."
Amid signs that inflation is poised to gradually ease, he, along with other economists, noted June likely marked its peak, though a similar pronouncement in the spring proved premature.
Stock market reaction
The report bolsters the Federal Reserve's plans in two weeks to raise its key interest rate by a hefty three-quarters of a percentage point for a second straight month as part of an aggressive campaign to curtail inflation.
The inflation figure and likelihood of a substantial rate hike disappointed already dour investors. Stocks ended the day lower, with the broad S&P 500 stock index down around 17 points, or 0.50%, while the Dow Jones Industrial Average fell more than 200 points, or 0.70%.
What is causing inflation?
June’s surge again was led by gasoline prices, which increased 11.2% from the prior month and 59.9% annually. The good news is unleaded regular averaged $4.65 Tuesday, down from $5 a month ago.
Grocery prices rose by 1% from May and 12.2% over the past 12 months. Both gas and food costs have been elevated largely because Russia’s war in Ukraine has disrupted global supplies of oil, wheat, corn and other commodities.
In June, cereal prices rose 2.5% from the prior month and 14.2% from a year ago. Bread was up 1.6% monthly and 10.8% annually. Chicken costs increased by 1.5% from May and 17.3% yearly.
There were some encouraging signs. Bacon prices fell 1.9%, its second straight large monthly decline. And beef and veal prices decreased by 2.3%.
Will food prices go down?
Commodity prices have tumbled recently amid recession fears and ebbing consumer demand. That already has pushed down gas prices and set the stage for more moderate food price increases within months, says Wells Fargo economist Sam Bullard.
Barclays economist Pooja Sriram, however, believes higher fertilizer costs for farmers could keep grocery prices fairly high throughout the year. Russia is the leading exporter of fertilizer and the Ukraine war has driven up the cost of that commodity as well as its chief ingredient, natural gas.
Core prices, which exclude volatile food and energy items, increased 0.7% in June following a 0.6% rise the prior month, That nudged down the annual rise to 5.9% from 6% in May, the third straight monthly decline.
What is rent inflation?
Rent climbed 0.8% monthly and 5.8% over the past year as people who hunkered down with family members during the pandemic moved into their own apartments.
There were some positive developments for summer travelers. Despite surging demand, airline fares fell 1.8% while hotel rates declined 2.8% but they're still up 34.1% and 10% from a year earlier, respectively.
There are hints that inflation will likely soften in the months ahead. Besides falling commodity prices, pandemic-induced supply chain troubles are abating, wage increases may be moderating and retailers’ bloated inventories are triggering big discounts for shoppers.
Also, consumer purchases have started shifting from goods to services, such as dining out and traveling, now that the pandemic is broadly easing.
Does the report raise recession risks?
The inflation figure does raise the risk of recession to some extent. Higher inflation leads consumers to rein in spending, which makes up about 70% of economic activity, and could mean bigger Fed rate hikes, which would hurt borrowing. Bank of America says the report is consistent with its call for a recession in the second half of the year.
Is this close to the worst inflation since World War II?
While inflation has hit a new four-decade high and is painful for millions of Americans, it's hardly the worst in recent history. In March 1947, U.S, inflation hit a dizzying 19.7%. The spike was rooted in effects from the end of the war – the elimination of price controls, supply shortages and pent-up demand, according to a White House blog.
In a statement, President Joe Biden called inflation "unacceptably high."
But he added, “It is hitting almost every country in the world. It is little comfort to Americans to know that inflation is also high in Europe, and higher in many countries than in America. But it is a reminder that all major economies are battling this COVID-related challenge, made worse by Putin’s unconscionable aggression.”
In Turkey, for example, inflation reached an annual rate of nearly 80% in June, and in the Eurozone, comprised of the 19 countries sharing the euro, inflation rose to 8.6%, the highest ever.
Contributing: Elisabeth Buchwald, Michael Collins.