Prices rose 9.1% in June from a year earlier, the fastest pace since 1981, as soaring gasoline prices, rising rents and rising grocery bills made everyday life more expensive for American households. The broad and faster-than-expected rise in prices spelled trouble for the Fed.
Inflation, which includes food and natural gas, is likely to moderate in July’s data as prices at gas stations have slowed in recent weeks. The national average cost of a gallon of unleaded gasoline peaked at about $5 last month. This week, it was around $4.65.
But gasoline prices are volatile and could spike again. The report contains unwelcome messages other than headline numbers. The core inflation index, which strips out food and fuel prices – giving a sense of an underlying inflation trend – remains high and faster than economists expected. The core index climbed 5.9% in the year to June, barely slowing from 6% in the previous report. From May to June, the core gauge actually climbed 0.7%, higher than the previous month’s increase, which is bad news for central bankers.
The global economy has been rocked by a series of shocks since the start of the coronavirus pandemic. Factory shutdowns and shipping shortages have disrupted supply chains, worker shortages have made it harder for airlines to fly at full capacity, hotels harder to rent out rooms, and Russia’s invasion of Ukraine disrupted oil and gas supplies. Economists have spent more than a year trying to predict how and when inflation will fall back.
“We now have a better understanding of how little we know about inflation,” Federal Reserve Chairman Jerome H. Powell said at a recent panel discussion in Sintra, Portugal.
The Fed, whose job is to keep prices stable and guide the economy toward full employment, is no longer waiting for normalcy to return. Central bankers worry that as inflation remains high and stubborn, consumers and businesses may get used to it.
If people start demanding higher wages in anticipation of price increases—for example, negotiating a cost-of-living adjustment of 6% or 7% instead of the typical 2% to 3%—companies can try to bring the ballooning workforce The cost is passed on to the customer by raising the price. That could perpetuate rapid inflation, making it difficult for the Fed to contain.
Given the threat, the central bank has been escalating its attack on inflation. The Fed first raised interest rates by 25 percentage points from near zero in March in an attempt to make borrowing expensive and slow consumer demand. The rate hike was 0.5 percentage points in May and 0.75 percentage points last month.
Many central bankers have made it clear that they want another 0.75 point hike in July and to around 3.5% by the end of the year. They could do this by raising rates by 0.5 percentage points in September and 25 percentage points in November and December.
The question is whether the data will slow the Fed down.
There are some hopeful signs. Retail prices are likely to slow further as stores like Target try to sell bloated inventory. GasBuddy’s Patrick De Haan said gas prices could continue to fall, especially if the situation in Ukraine de-escalates.
That being said, the possibility that hurricane season could disrupt supplies clouded the natural gas outlook.
“It could reverse – I don’t want to say the coast is still clear,” Mr DeHaan said.
Geopolitics poses another possible wild card: White House officials are trying to offset the risk that a new round of European penalties aimed at curbing the flow of Russian oil by the end of the year could lead to another rise in global energy prices.
Other upward pressures on inflation remain. For example, rent accounts for a large portion of household budgets and is climbing rapidly.
Economists at Goldman Sachs expect monthly readings of core CPI — a gauge of underlying inflationary pressures — to “remain strong in late summer” and pick up in early fall before slowing towards the end of the year.