US Inflation Quickens to 40-Year High, Pressuring Fed and Biden

US inflation accelerated to a fresh 40-year high in May, a sign that
price pressures are becoming entrenched in the economy. That will
likely push the Federal Reserve to extend an aggressive series of
interest-rate hikes and adds to political problems for the White House
and Democrats.

The consumer price index increased 8.6% from a year earlier in a
broad-based advance, Labor Department data showed Friday. The widely
followed inflation gauge rose 1% from a month earlier, topping all
estimates. Shelter, food, and gas were the largest contributors.

The so-called core CPI, which strips out the more volatile food and
energy components, rose 0.6% from the prior month and 6% from a year
ago, also above forecasts.

The figures dash any hope that inflation had already peaked and was
starting to ebb. Record gasoline prices, paired with unrelenting food
and shelter costs, are adding strain to Americans’ cost of living,
suggesting the Fed will have to pump the brakes on the economy even
harder. That raises the risk of a recession, which some economists
already saw as likely next year.

“There’s little respite from four-decade high inflation until energy
and food costs simmer down and excess demand pressures abate in
response to tighter monetary policy,” Sal Guatieri, senior economist
at BMO Capital Markets, said in a note. “The Fed might still raise
policy rates ‘just’ 50 bps next week, but it could easily ratchet up
the pace beyond then if inflation keeps surprising to the high side.”

Two-year Treasury yields jumped, stocks opened lower and the dollar
rose. Traders fully priced in 50-basis-point rate hikes over the Fed’s
next three policy meetings in June, July, and September.

In May, prices for necessities continued to rise at double-digit
paces. Energy prices climbed 34.6% from a year earlier, the most since
2005, including a nearly 49% jump in gasoline costs. Gas prices so far
in June have climbed to new highs, signaling more upward pressure in
coming CPI reports and therefore keeping the Fed in the hot seat.

Grocery prices rose 11.9% annually, the most since 1979, while
electricity increased 12%, the most since August 2006. Rent of primary
residence climbed 5.2% from a year earlier, the most since 1987.

There are growing risks that price pressures in those categories will
continue to build. Russia’s ongoing war in Ukraine, as well as
stepped-up related sanctions; potential port disruption due to the
upcoming West Coast dockworker contract expiration; Covid-related
lockdowns in China, and drought could all contribute to higher prices
for food and energy.

“Tighter monetary policy will not help much with surging global
commodity prices or structural changes in the way people spend and
live in the post-pandemic economy,” Wells Fargo & Co. economists Sarah
House and Michael Pugliese said in a note.

That likely spells further trouble for President Joe Biden, whose
approval ratings have sunk to new lows ahead of midterm elections
later this year. While the job market remains a bright spot,
decades-high inflation is crippling confidence among the American
people and largely outpacing wage gains.

Inflation-adjusted average hourly earnings fell 3% in May from a year
earlier, the biggest drop since April 2021 and the 14th straight
decline, separate data showed Friday. That’s killing consumer
sentiment, which plunged in early June to the lowest on record, and
inflation expectations moved higher, according to data from the
University of Michigan released after the CPI.

Furniture, including bedding, was one of the few categories to post a
monthly decline. Prices for goods such as apparel, meanwhile,
continued to climb, contributing to the stronger-than-forecast core

Before the report, economists had already revised their estimates for
year-over-year inflation through the third quarter of 2023, according
to the latest Bloomberg survey.

Airfares rose 12.6% in May, a slight moderation from the prior month
but still up the most on an annual basis since 1980. Prices for hotel
stays, meanwhile, were up 22.2% year-over-year. Rising demand for
travel and entertainment this summer, particularly among wealthier
households who have the savings to support discretionary spending, as
well as tight labor market conditions will likely maintain upward
pressure on services inflation in the coming months.

So far, consumer spending has held firm in the face of inflation,
supported by savings and credit cards. Some economists fear that the
Fed will go too far in tightening policy, risking weaker spending.

Shelter costs — which are the biggest services component and make up
about a third of the overall CPI index — rose 0.6% in April, the most
since 2004, and 5.5% from last year, the most since 1991. Economists
don’t expect housing inflation to peak until later this year,
suggesting further increases in these categories.

Used car prices, which had been cooling in recent months, advanced
1.8% in May, the most this year. New-vehicle prices climbed 1%.

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