Inflation Soared in June, Pinching Consumers and Challenging Policymakers

June prices soared 9.1% as consumers faced sharp rises in gas, food and rent. This is unexpectedly hot reading and bad news for Americans, as wages are even lower than the country’s soaring cost of living.

Fresh data includes some particularly worrisome signs of the Federal Reserve, providing evidence that price pressures are widespread and stubborn and can make efforts under control difficult. ..

Overall, inflation could ease in July as gas prices fell this month. A gallon of regular gas in June averaged about $ 5, and costs are currently around $ 4.63. However, fuel prices are volatile and it is impossible to know if gas prices will continue to fall today, and the report suggests that the underlying inflationary pressures remain strong.

In particular, the core inflation index, which removes food and fuel prices and makes us feel a broad trend, remained surprisingly high. It rose 5.9% in the year to June, barely slowing from 6% in the previous report, and rose 0.7% from May to June, outpacing the previous month’s increase.

High inflation could cause problems for President Biden, whose approval rate was hit as prices rose, and elicit a strong reaction from the Fed. Central banks are raising interest rates in an attempt to slow the economy and curb inflation. Inflation appears to be increasingly out of control, and even if doing so risks a recession, it may continue to adjust policies quickly.

“This is an ugly report,” said Julia Coronado, founder of MacroPolicy Perspectives. “As far as the Fed is concerned, as far as US consumers are concerned, I don’t think there’s anything good about this report.”

The world economy has been plagued by a series of shocks that have boosted inflation since the outbreak of the pandemic. Factory closures and lack of transportation have disrupted the supply chain, and labor shortages have made it difficult for airlines to reach capacity and hotels to rent rooms. Russia’s invasion of Ukraine disrupted gas and food supplies.

Economic policymakers initially wanted the turmoil to diminish and prices to ease naturally, but prices have risen not only significantly but also extensively, rapidly with a variety of commodities and services. I stopped waiting for it to happen because it was rising to.

The Federal Reserve has raised interest rates since March to slow down consumer and corporate demand, hoping to cool the economy and restore inflation. Central banks have accelerated these interest rate fluctuations as inflation proved to be surprisingly stubborn, and new inflation reports have spurred speculation that the Fed could be even more aggressive.

Authorities were expected to raise interest rates by 0.75 percentage points in June, the biggest move since 1994, and make a similar move at a meeting in late July. However, following the release of new inflation data, investors have begun bidding on the opportunity to move percentage points, the biggest move since the 1980s.

Blerina Uruci, economist at T. Rowe Price, said the fact that core inflation is rising on a monthly basis is “especially of concern to the Fed.” “It sends a wide range of signals. It is not driven by one or two volatile components.”

The Federal Reserve is at risk of a recession due to the rapid rise in interest rates. This is because these rises can have a devastating impact on the economy, frustrating businesses, quitting employment and causing a chain reaction that leaves households behind. I don’t have much money to spend.

But policymakers feel that inflation must be curbed quickly, even if it increases the likelihood of a painful slowdown. That’s because inflation is so rapid that consumers and businesses are worried that they may get used to it.

If people start demanding higher wages in anticipation of rising prices (for example, negotiating a living cost adjustment of 6-7% instead of the usual 2-3%), the company will price the inflated labor costs. Customers by raising. It can perpetuate rapid inflation, making it very difficult for the Fed to counteract it.

“Topline numbers are a cause for concern,” Atlanta Federal Reserve Bank Governor Raphael Bostic told reporters Wednesday. “Everything is working. You need to work with your team to really understand what this looks like and what it means in terms of the overall trajectory of inflation. I have.”

“I wasn’t tied to a particular course of action,” Bostic said.

Inflation is now high in many parts of the world as Russia’s invasion of Ukraine pushes up food and fuel prices and supply chain problems continue to scarce some commodities. However, the new inflation report also provides evidence of price pressures that have little to do with global supply. Restaurant meals, sporting event tickets and other services are becoming more and more expensive.

For consumers, fresh reporting is a confirmation that achieving their goals is becoming increasingly difficult. Wages are rising, but they have not kept up with the sharp rise in prices. After considering price increases, it has fallen 3.6% over the past year. At the same time, essentials are becoming more expensive. Food prices in June rose 10.4%, the highest annual rate of increase since 1981, and household food prices rose 12.2%, the highest since 1979. Rents for homes and apartments have also risen significantly, rising fastest. Monthly pace since 1986.

It makes the lives of many families difficult. Soaring housing costs have made it difficult for Elizabeth Haynes, 41, who lives with her husband to move to McKinney, Texas. The couple wants to move to another state, but so far the high housing costs are exorbitant.

“We’re trying to get out of Texas, but rents, housing costs, shortages, etc. all prove to be very difficult,” says Haynes, who wants to land in a place where Connecticut can afford. Said. .. “That’s one of our big problems.”

The sharp rise in prices puts a strain on many Americans, which is also damaging financial confidence and poses a major challenge to Mr Biden and Democrats prior to the midterm elections. Biden acknowledged the pain caused by inflation in his Wednesday statement and said it was “unacceptably high.”

However, he also called the report “obsolete” because he did not capture the recent decline in prices for gasoline pumps and other commodities. Democrats have suggested that things will get better soon, pointing out that headline inflation is likely to drop from 9.1% in June as fuel costs go down.

When asked about her reaction to the new data, Speaker of the House Nancy Pelosi said, “I think we’re at a peak. We’re going down from here.” ..

While there is hope for a sustained decline in inflation in Washington and Wall Street, economists have repeatedly suggested that inflation has peaked in the last 12 months just to see it recover.

This is partly due to the strange behavior of certain good prices. For example, the supply of cars is in short supply and prices are skyrocketing. Another reason is that economists have rejected significant price fluctuations in various products and services as temporary temporary, and surprises continue to increase.

“People aren’t doing a very good job of predicting car inflation,” said Jason Ferman, an economist at Harvard University. “Beyond that, inflation is about more than 10 individual stories about 10 individual goods and services, and it’s about the power of the economy as a whole.”

That said, there are several reasons why today’s sharp rises in prices could ease, based on economic fundamentals.

As prices skyrocket, consumers may struggle to maintain spending. When they move with their roommates, stop taking vacations, or stop social activities to save money, supply can start catching up with demand and price increases can slow down.

Stores including targets Retail prices may slow in the future as we are trying to sell off already bloated inventory. The cost of goods such as sporting goods and televisions is already starting to cool.

But for now, if there are few signs of data that a coordinated pullback has begun, cool-down tips and forecasts may not be comfortable enough for economic policy makers.

“We have to be very humble when it comes to forecasting inflation,” said Uruci of T. Rowe Price, who expects inflationary pressures to diminish. “We were very consistent and very wrong in one direction.”

The report was contributed by Isabella Simonetti, Jim Tankersley, Emily Cochrane, Ana Swanson and Joe Rennison.