U.S. Inflation Hits 9.1%

Last month, U.S. inflation roared to a new four-decade high, likely strengthening the Federal Reserve’s resolve to aggressively raise interest rates and risk up-ending the economic expansion.

The consumer price index (CPI) rose 9.1 percent from a year earlier in a broad-based advance—the largest gain since the end of 1981, Labor Department data showed Wednesday. The widely followed inflation gauge increased 1.3 percent from a month earlier, the most since 2005, reflecting higher gasoline, shelter, and food costs.

Economists projected a 1.1 percent rise from May and an 8.8 percent year-over-year increase, based on the Bloomberg survey medians. This was the fourth-straight month that the headline annual figure topped estimates.

The so-called core CPI, which strips out the more volatile food and energy components, advanced 0.7 percent from the prior month, and 5.9 percent from a year ago, also above forecasts.

The S&P 500 index opened lower, while shorter-term Treasury yields rose and the dollar strengthened.

These red-hot inflation figures reaffirm that price pressures are rampant and widespread throughout the economy, and are taking a big toll on real wages, which are down the most ever in data back to 2007. The inflation data will keep Fed officials on an aggressive policy course to rein in demand, and the numbers add pressure to President Joe Biden and congressional Democrats whose support has slumped ahead of midterm elections.

Risks Ahead

Several factors, such as housing, stand to keep price pressures elevated for longer. Geopolitical risks, including Covid lockdowns in China and Russia’s war in Ukraine, also pose risks to supply chains and the inflation outlook.

“Rather than cooling down, inflation is heating up,” Sal Guatieri, senior economist at BMO Capital Markets, said in a note. “While a pullback in gasoline costs in July and reported retail discounting will help tamp down the flames, the broad pressure in the core rate, led by plenty of inertia in rents, suggests inflation may not peak for a while and might remain stubbornly high for longer than anticipated.”

Fed policymakers have already signaled a second 75 basis-point (bps) hike in interest rates later this month, amid persistent inflation as well as still-robust job and wage growth. Even before the data were released, traders had already fully priced in such a move. Now, they also see around a one-in-three chance that the July rate increase could be a full percentage point.

The higher and faster that the Fed goes with rate hikes, the more it increases risks of a U.S. recession, which several economists see in the next 12 months. Even so, the labor market has held strong, adding nearly 400,000 jobs last month.

What Bloomberg Economists Say…

“It was premature for some to preemptively dismiss the June CPI report as old news, as it shows inflation creeping up in places where it can be harder to squash. The Fed is right to worry about the unmooring of inflation expectations—and this report raises the chance of an even larger rate hike than 75 basis points down the line.”

— Anna Wong & Andrew Husby, economists

Prices for household necessities continued to post outsized increases last month. Gas prices rose 11.2 percent in June from a month earlier. Prices for energy services, which includes electricity and natural gas, increased 3.5 percent, the most since 2006.

Biden is traveling to the Middle East this week to discuss energy output with Saudi and other Gulf leaders, in hopes of lowering high prices at the pump. Retail gas prices topped $5 on average nationwide in June, though they’ve since subsided somewhat. Food costs, meanwhile, climbed 1 percent and 10.4 percent from a year ago, the largest increase since 1981.

Early earnings results from PepsiCo Inc. show some companies are still successfully passing through recent price surges in commodities. The maker of Fritos and Mountain Dew was able to charge customers about 12 percent more, on average, in the second quarter. Even so, the company said volumes have held up well.

The cost of goods rose 2.1 percent from May, while a 0.9 percent increase in services costs was the largest in more than 21 years. Economists have been expecting consumers to rotate their spending from goods to services as Covid-related concerns fade, but goods prices so far are still elevated.

Meanwhile, there’s reason to believe that food and energy costs are subsiding, according to Wells Fargo & Co. economists. Particularly for groceries, “we suspect more significant easing ahead, as raw material, transportation, and wage costs have started to cool,” they said in a note.

Rent of primary residence rose 0.8 percent from May, the largest monthly advance since 1986. Owners’ equivalent rent increased 0.7 percent, the most in nearly 32 years.

While home sales have slowed in recent months due to higher mortgage rates, economists expect rental inflation to continue to increase, because it takes time for price changes to feed into the CPI.

The cost of hotel and airline fares, as well as car rentals, fell from May to June following historic increases in recent months. Even so, recent commentary from U.S. airlines have indicated that travel demand remains strong. Used car prices, which were a major contributor to inflation last year, rose 1.6 percent from a month ago, while new vehicle prices increased 0.7 percent.

Higher prices continue to eat away at consumer incomes, despite strong nominal wage gains. Inflation-adjusted average hourly earnings dropped 3.6 percent in June from a year earlier, the 15th straight decline and largest in data back to 2007, separate data showed Wednesday. That’s started to impact spending: Inflation-adjusted consumer expenditures fell 0.4 percent in May, the first decline this year.

—With assistance from Chris Middleton & Sydney Maki.

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