Prices rose 9.1 percent in June as consumers faced rapidly rising costs for gasoline, food and rent, an unexpectedly high reading and bad news for Americans at a time when their wages they are falling further below the nation’s rising cost of living.
The new data contained particularly worrying signs for the Federal Reserve, providing evidence that price pressures are broad and stubborn in ways that can make them difficult to control.
Overall, inflation is likely to moderate in July because gas prices have fallen this month: A gallon of regular gas averaged around $5 in June, and now costs around $4.63. But fuel prices are volatile and it is impossible to know whether today’s lower gasoline prices will last, and the report suggested underlying inflationary pressures remained intense.
In particular, an index of core inflation that excludes food and fuel prices to give an idea of the general trend remained surprisingly high. It rose 5.9 percent in the year to June, just a slowdown from the 6 percent in the previous report, and rose 0.7 percent from May to June, more than the previous monthly increase.
The soaring inflation figures spelled trouble for President Biden, whose approval ratings have taken a hit amid the price rally, and could prompt a forceful response from the Federal Reserve. The central bank is raising rates to slow the economy and try to contain inflation, and is likely to continue to tighten policy rapidly, even if doing so risks tipping the economy into recession, as inflation appears to be on the rise. out of control again.
“It’s an ugly report,” said Julia Coronado, founder of MacroPolicy Perspectives. “I don’t think there is anything good in this report, as far as the Fed is concerned, as far as the American consumer is concerned.”
The global economy has been hit by a series of shocks that have raised inflation since the start of the pandemic. Factory closures and shipping shortages have disrupted supply chains, and worker shortages are making it difficult for airlines to fly at full capacity and for hotels to rent rooms. The Russian invasion of Ukraine has disrupted gas and food supplies.
While economic policymakers initially hoped that the disruptions would fade and prices would decline on their own, they have given up waiting for that to happen, especially as price increases are not only steep but also widespread, rising rapidly in a variety of goods and services.
The Fed has been raising interest rates since March in an effort to curb consumer and business demand, hoping to cool the economy and reduce inflation. The central bank has accelerated those rate moves as price increases have proven surprisingly stubborn, and the new inflation report sparked speculation that the Fed could become even more aggressive.
Officials raised rates by 0.75 percentage point in June, the biggest move since 1994, and were expected to make a similar move at their meeting in late July. But after the release of the new inflation data, investors began to increase the chances of a one percentage point move, which would be the biggest move since the 1980s.
The fact that core inflation is picking up on a monthly basis is “particularly worrying for the Fed,” said Blerina Uruci, an economist at T. Rowe Price. “It’s sending a broad-based signal: It’s not being driven by one or two volatile components.”
The Federal Reserve risks pushing the economy into a recession as it rapidly raises interest rates, because those increases could slow the economy so hard that they would rattle businesses, prompt them to stop hiring and trigger a backlash in chain in which households are left with less money to spend.
But policymakers feel they must quell inflation quickly even if the possibility of a painful slowdown increases. That’s because they worry that as inflation remains rapid, consumers and businesses may be getting used to it.
If people start asking for higher wages in anticipation of price increases (negotiating cost-of-living adjustments of 6 or 7 percent, for example, instead of the typical 2 or 3 percent), companies might try to spend their rising labor costs to customers by raising prices. That could perpetuate rapid inflation, making it that much harder for the Federal Reserve to crack down on it.
Inflation is high in much of the world right now, as the Russian invasion of Ukraine drives up food and fuel prices and supply chain issues continue to keep 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 getting harder to make ends meet. While wages are rising, they have failed to keep up with rapid price increases. After taking price increases into account, they are down 3.6 percent over the past year. At the same time, necessities are becoming more expensive. Overall food prices rose 10.4% in June from a year earlier, the largest annual increase since 1981, and food at home increased 12.2%, the most since 1979. monthly pace since 1986.
That is complicating the lives of many families. High housing costs have made relocating difficult for Elizabeth Haynes, 41, who lives with her husband in McKinney, Texas. The couple wants to move to another state, but so far high housing costs are prohibitive.
“We’re trying to get out of Texas, and that’s proving very difficult with rent costs, housing costs, shortages and all of that,” said Ms. Haynes, who hopes to get a place she can afford in Connecticut. . “So that’s our big pain point.”
As rapid price increases overwhelm many Americans, they are also taking a toll on economic confidence, posing a major challenge for Biden and Democrats ahead of the midterm elections. Biden acknowledged the pain that inflation is causing, saying in a statement Wednesday that it is “unacceptably high.”
But he also called the report “out of date” because it failed to capture the recent drop in prices at gas stations and other basic goods. Democrats have suggested things will get better soon, noting that as fuel costs decline, headline inflation is likely to ease from its 9.1 percent reading in June.
“I think we’re peaking, I think we’re going to go down from here,” Rep. Nancy Pelosi, the House Speaker, said when asked for her reaction to the new data.
While there is hope in Washington and on Wall Street that inflation will come down sustainably, economists have repeatedly suggested that inflation peaked in the past 12 months only to see it bounce back.
That’s partly because certain good prices have behaved strangely: cars have been in short supply and their prices have skyrocketed, for example. It is also in part because economists have dismissed large price swings for various goods and services as temporary exceptional cases, and the surprises have continued to pile up.
“People haven’t done a very good job of predicting auto inflation,” said Jason Furman, an economist at Harvard. “Beyond that, inflation is about more than 10 individual stories about 10 individual goods and services — it’s about forces in the broader economy.”
That said, there are a few reasons why today’s rapid price gains could slow based on economic fundamentals.
Consumers may find it difficult to keep their spending down as prices rise. If they move in with roommates, stop taking vacations, or stop participating in social activities to try to save money, supply could begin to catch up with demand, allowing price gains to slow.
Stores that include Target they are already trying to sell inflated inventories, which could allow retail prices to slow in the future. The costs of goods, including sports equipment and televisions, have already started to cool down.
But for now, signs and forecasts of a cooldown are likely to be insufficient consolation for policymakers when there is little sign in the data that a concerted pullback is taking place.
“We have to be very humble in forecasting inflation,” said Ms. Uruci of T. Rowe Price, who hopes inflation pressures will fade. “We have been so wrong, so consistently, in one direction.”
Reporting was contributed by Isabella Simonetti, Jim Tankersley, Emily Cochrane, Ana Swanson, and Joe Rennison.