Rising CPI makes the Federal Reserve - the US central bank - may be forced to raise interest rates further later this month. U.S. inflation hit a fresh four-decade high last month, potentially reinforcing the Federal Reserve's aggressive determination to raise interest rates, which could boost economic growth. The consumer price index rose 9.1% from a year earlier in a broad-based advance, the biggest gain since late 1981, Labor Department data showed on Wednesday. The widely watched measure of inflation rose 1.3% month-on-month, the highest since 2005, reflecting rising gas, housing, and food costs.
Economists forecast a 1.1% increase from May and an 8.8% increase year-on-year, based on Bloomberg survey vehicles. This is the fourth consecutive month that the annual overall figure has exceeded estimates. The core CPI, which excludes the most volatile food and energy components, rose 0.7 percent month-on-month and 5.9 percent from a year ago, well above forecasts. The S&P 500 index opened lower as short-term Treasury yields rose and the dollar strengthened.
The stinging inflation figures reaffirm that price pressures are endemic and pervasive across the economy and are continuing to weigh on real wages, which are falling by the most on record since 2007.
The inflation data should prompt aggressive policy from Fed officials to curb demand and add pressure on President Joe Biden and congressional Democrats, whose support has plummeted ahead of the election. midterm elections. Risks in the future Some factors, such as housing, will keep price pressures high for longer.
Geopolitical risks, including the Covid shutdowns in China and Russia's war in Ukraine, also pose risks to the supply chain and inflation outlook. "Instead of cooling down, inflation is picking up," Sal Guatieri, senior economist at BMO Capital Markets, said in a note. "While the drop in gasoline costs in July and the reported retail discounts should help quell the flames, strong pressure on the prime rate, due to high rent inertia, suggests inflation may be not peaking for a while and could continue to stay high for longer than expected.” Fed policymakers signaled a second 75 basis point rate hike later this month amid persistent inflation and still-strong wage and job growth. Even before the release of the data, traders fully appreciated such a decision.
They also now see that there's a one-third chance it's a full percentage point. The higher the Fed rises, the faster the risk of a potential recession in the US increases, which many economists see over the next 12 months. Still, the labor market remains strong, adding nearly 400,000 jobs last month.
Prices of household essentials continued to rise sharply last month. Gasoline prices increased 11.2% in June from the previous month. Prices for energy services, including electricity and natural gas, rose 3.5%, the highest since 2006. Biden will travel to the Middle East this week to discuss energy production with Arab leaders Saudi Arabia and other Gulf leaders with high hopes of a price drop at pump levels. Retail gasoline prices averaged $5 nationally in June, though they have since fallen somewhat. Meanwhile, food costs rose 1% and 10.4% respectively from a year ago, the biggest increases since 1981. Initial results from PepsiCo Inc. show that some companies are still succeeding in weathering recent commodity price spikes.
The maker of Fritos and Mountain Dew was able to charge customers about 12% more on average in the second quarter. However, the company says volumes are well maintained. Cost of goods increased 2.1% from May, while the 0.9% increase in the cost of services was the largest in more than 21 years. Economists expect consumers to shift spending from goods to services as Covid concerns fade, but commodity prices have so far remained high. Wells Fargo & Co economists. thinks there is reason to believe that food and energy costs are falling. As for groceries, "we suspect further easing as raw material, transportation, and wage costs begin to decline," they said in a note. Rent, housing Primary rents rose 0.8 percent from May, the biggest monthly increase since 1986. Homeowners' equivalent rents rose 0.7%, the highest in nearly 32 years. As home sales have slowed in recent months due to rising mortgage rates, economists expect rental inflation to continue to rise as it takes time for price changes to subside slightly in the index. CPI number.
The cost of hotels and airline tickets, as well as car rentals, fell from May to June,
following historic increases in recent months. Even so, recent comments by US airlines have indicated that travel demand remains strong. Used car prices, the main driver of inflation last year, rose 1.6 percent month-on-month, while new car prices rose 0.7 percent. Rising prices continue to eat away at consumer incomes, despite strong nominal wage growth. Average hourly wages adjusted for inflation fell 3.6% in June from a year earlier, the 15th consecutive decline and the largest in data since 2007, according to the data. separately published on Wednesday. This is starting to have an impact on spending – inflation-adjusted consumer spending fell 0.4% in May, the first decline this year.
(More comments from economists) –With help from Chris Middleton and Sydney Maki. SOURCE: BLOOMBERG