Prices rose 9.1 percent in June from a year earlier, the fastest pace since 1981, as rising gas prices, rising rents and rising grocery bills made everyday life more expensive for American households. The rise in prices was broad and faster than expected, spell trouble for the Federal Reserve.
The inflation index, including food and gas, could slow in July as pump prices have fallen in recent weeks. The national average cost of a gallon of unleaded gas peaked at about $5 last month. This week it was about $4.65.
But gas prices are volatile and could skyrocket again. The report contained unwelcome news outside the headline number. A core inflation index that excludes food and fuel prices — and gives a sense of underlying inflation trends — remains high, coming in faster than economists had expected. The core index climbed 5.9 percent from the year to June, barely a 6 percent slowdown in the previous report. The core measure actually climbed 0.7 percent from May to June, more than the previous monthly increase and bad news for central bankers.
The global economy has been ravaged by a series of shocks that have not stopped since the start of the coronavirus pandemic. Factory closures and shipping shortages have shaken supply chains, staff shortages make it more difficult for airlines to fly at full capacity and hotels to rent out rooms, and the Russian invasion of Ukraine has disrupted oil and gas supplies. Economists have struggled for more than a year to predict how and when inflation will fall again.
“We now understand better how little we understand about inflation,” Fed chairman Jerome H. Powell said at a recent panel in Sintra, Portugal.
The Fed, tasked with keeping prices stable and leading the economy to full employment, is no longer waiting for normality to return. Central bankers are concerned that as inflation remains high and persistent, consumers and businesses may get used to it.
If people start demanding higher wages in anticipation of price increases — for example, by negotiating cost-of-living adjustments of 6 or 7 percent instead of the typical 2 to 3 percent — companies could try to pass on rising labor costs to customers by to raise prices. That could perpetuate rapid inflation, making it much more difficult for the Fed to stamp out.
Given the threat, the central bank has stepped up its attack on inflation. The Fed first raised interest rates from nearly zero, by a quarter of a point, in March to try to make money expensive to borrow and curb consumer demand. It raised interest rates by half a point in May and by 0.75 percentage point last month.
Many central bankers have made it clear that they want to hike another 0.75-point in July and hope to push interest rates close to 3.5 percent by the end of the year. They could achieve this by raising interest rates by half a point in September and by a quarter of a point in November and December.
The question is whether the data will slow the Fed down.
There are some hopeful signs. Retail prices could slow further as stores like Target try to sell bloated inventory. And gas prices can continue to fall, says Patrick De Haan of GasBuddy, especially if there is a de-escalation in Ukraine.
That said, the gas outlook has been clouded by the possibility that the hurricane season could disrupt supply.
“It could turn around – I’m not saying the coast isn’t clear yet,” Mr De Haan said.
Geopolitics poses another potential wildcard: White House officials worry that another round of European fines aimed at curtailing Russia’s oil flow by year-end could push global energy prices back up , and try to compensate for that risk.
And other upward pressure on inflation continues. Rents form a large part of the household budget and are rising rapidly, for example.
Economists at Goldman Sachs expect monthly values of the core CPI – the metric that measures underlying inflationary pressures – to “stay strong into late summer” and pick up again in early fall before slowing down towards the end of the year.