Inflation isn’t getting much better: Consumer prices surged again in June, reaching a new four-decade high as many Americans are already feeling frustrated with higher costs denting their budgets.
The US Consumer Price Index (CPI), which measures the change in prices for goods and services, rose 9.1 percent from a year earlier and 1.3 percent from May, according to Labor Department data released on Wednesday.
The new numbers mean the Federal Reserve is likely to continue aggressively raising interest rates, making it more expensive to borrow money in the hope that Americans will spend less. The jump in inflation is bad news for President Joe Biden, whose approval ratings are stubbornly low. And although gas prices have started to drop in recent weeks, economists and forecasters warn that the situation might not significantly improve for some time, making it harder for people to afford essentials like housing and groceries.
“It reinforces for consumers that inflation is still a bit out of control,” said Kathy Bostjancic, the chief US economist at Oxford Economics. “And it’s only going to keep sentiment sour on that front.”
Nearly everything grew more expensive, but the price gains were mainly fueled by an increase in energy, food, and shelter costs, which have been climbing for months amid supply chain disruptions and Russia’s invasion of Ukraine. Energy prices drove most of the gains, with gas prices up 11.2 percent in June from the month before. Food prices increased 1 percent as consumers paid more for cereal, dairy products, fruits and vegetables, and other items at the grocery store.
Core prices, which exclude volatile food and energy costs, rose an uncomfortably high 0.7 percent from May to June, a slightly bigger increase compared to the month before, when core prices jumped 0.6 percent.
Economists and forecasters were already widely expecting the Fed to lift interest rates another 0.75 percentage points at its next policy meeting this month. That would make it more expensive to borrow money and do things like buy a home or take out a car loan. The goal is to weaken consumer demand, leading to Americans spending less, and, eventually, prices dropping.
Several Fed officials have publicly supported the move to make another big rate increase in recent weeks. Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, said he was “fully supportive” of the move after a stronger-than-expected report showed that employers added 372,000 jobs to the economy in June.
“We can move at 75 basis points at the next meeting and not see a lot of protracted damage to the broader economy,” Bostic said in a CNBC interview last week.
Wednesday’s CPI data will further cement that move, said Omair Sharif, the founder of research firm Inflation Insights. Central bank officials want to see a meaningful slowdown in price gains, including for food and gas prices since they are a significant burden on many American households, Sharif said.
“For the Fed, this latest reading is miles away from ‘compelling evidence’ that inflation is coming down,” Gregory Daco, the chief economist at EY-Parthenon, wrote in a research note after the report’s release.
Minutes from the Fed’s last meeting showed that central bank officials were worried about inflation becoming a more permanent fixture of the economy, leading to the decision to raise rates by 0.75 percentage points in June. That was the biggest hike since 1994 and marked the third time the Fed has increased rates this year after keeping them at near zero for much of the pandemic.
Although the strength of the labor market has calmed some recession fears, economists are still concerned about the risk of an economic downturn as the Fed’s rate hikes weigh on the economy.
The Fed is hoping to pull off a “soft landing” by reducing consumer demand without going too far, but recent consumer spending data has already shown signs of a cooling economy and consumer sentiment has sunk to record lows.
An “uncomfortable period” ahead
Although many economists say inflation will stay at high levels at least through the end of the year, there are some signs that prices could be moderating. Gas prices are already starting to fall from their recent peak of $5 a gallon and are now averaging about $4.63, which could be reflected in future CPI data, and the cost of home goods and apparel could come down as more retailers like Target slash prices on excess inventory. But economists say it’s difficult to tell whether inflation peaked in June, given the volatility of energy prices.
“We’ve seen relief at the pump,” said Laura Rosner-Warburton, a senior economist at MacroPolicy Perspectives. “They’ve moved lower but it’s still very uncertain. A lot of this is going to depend on what happens with the Ukraine war and sanctions.”
Few categories saw prices drop in June, although costs for airline fares and hotels declined after sharp increases in recent months, small bright spots in the report.
Rapid inflation has posed a challenge for the White House and weighed down President Biden’s approval ratings ahead of this year’s midterm elections. Although Biden has proposed lowering the cost of prescription drugs and vocalized his support for the Fed’s rate hikes, economists say many factors that would have a big impact on bringing down costs are largely out of the administration’s control.
The White House attempted to play down the CPI data after its release, pointing to recent relief from lower gas prices.
“While today’s headline inflation reading is unacceptably high, it is also out-of-date,” Biden said in a statement Wednesday. “Energy alone comprised nearly half of the monthly increase in inflation. Today’s data does not reflect the full impact of nearly 30 days of decreases in gas prices.”
Inflation will likely remain elevated at high levels through the end of the year, economists say. Bostjancic, at Oxford Economics, projects that inflation will still be running around 7 percent at the end of the year, far higher than the Fed’s goal of 2 percent inflation. And she predicts that the United States won’t see a significant ramp down in prices until well into next year.
“It’s going to be an uncomfortable period for consumers,” Bostjancic said. “They’re going to be facing higher borrowing rates and still sticky inflation.”
Sarah House, a senior economist at Wells Fargo, said a combination of events will have to happen before inflation significantly comes down, including the easing of supply chain constraints, tighter monetary policy, and reduced consumer spending.
“It’s going to be a while before I think consumers begin to feel a lot of relief on the inflation front,” House said.