Consumer prices surged in June at their highest pace in 40 years, increasing at an annual rate of 9.1% as gasoline and food prices drove inflation to record levels, the Bureau of Labor Statistics reported on Wednesday.
Economists had forecast an 8.8% number, up from May’s 8.6%.
“The increase was broad-based, with the indexes for gasoline, shelter, and food being the largest contributors,” the report said. “The energy index rose 7.5 percent over the month and contributed nearly half of the all items increase, with the gasoline index rising 11.2 percent and the other major component indexes also rising. The food index rose 1.0 percent in June, as did the food at home index.”
If there was one bright spot, it was that the core index that excludes food and energy costs, dipped slightly in June to 5.9% annually from 6% in May.
The reading is a major blow to the White House and will do little to change the trajectory of higher interest rates – and likely slower economic growth – set in place by the aggressive reversal of easy monetary policy two months ago by the Federal Reserve.
Last month, following May’s report that the consumer price index rose at an annual rate of 8.6%, the central bank took the unusual step of raising interest rates by 75 basis points, or three-quarters of a point. A similar hike is expected at the Fed’s meeting later this month.
“Over the next few months, the path has been set by the Fed and well articulated by the Fed,” says Nanette Abuhoff Jacobson, global investment strategist for Hartford Funds. “There’s a willingness by the Fed, a bias by the Fed, to hike rates.”
While President Joe Biden has publicly stated his support for Fed Chairman Jerome Powell and stressed the political independence of central bankers, the course the Fed is on still presents a political problem for the White House. Officials there are trying to put the best light on an economy that has seen a strong recovery from the pandemic and a red-hot labor market but one marked by persistent price increases for everyday items like food and gasoline.
On Tuesday, officials within the Biden administration tried to put a favorable spin on what they knew would be a bad report with officials touting both the strong job growth, low unemployment and even recent signs that inflation may be slowing somewhat.
Brian Deese, National Economic Council director, and Cecilia Rouse, chair of the Council of Economic Advisors, pointed out that energy prices have receded since the data was collected for the June CPI. They also noted that other indicators of inflation, such as the personal consumption expenditures index that the Fed follows closely, have shown inflation receding and at a lower level than the CPI.
“But, the June CPI will largely not reflect the substantial declines in gas prices that we’ve seen since the middle of June,” they said. “CPI data captures the average price over the course of a month. Retail gas prices per gallon peaked at $5.02 on June 13 and averaged $4.92 across the month. Gas prices are now down to around $4.68, a 5% decline from the June average – with the July average already more than 3% below the June average.”
James Knightley, chief international economist for ING, says the CPI is so heavily weighted toward housing, used vehicles and gasoline that recent drops in mortgage rates, used cars and gas prices, if they stick, could yield much lower inflation in 2023.
Gasoline, with a 3.7% weight in the CPI, “is currently contributing 2 percentage points of the 8.8% rate,” Knightley says. “If gasoline prices stabilize that takes those 2% off so just from those three components we could see inflation dropping below 3% by the end of next year.”
The White House officials emphasized that the economy has enough strength, particularly in the labor market where jobs are plentiful, to withstand the tough medicine the Fed is doling out.
Labor experts say demand for workers from companies remains strong, but that some of the frenzy of last year and early 2022 has died down.
“Even as business leaders navigate ongoing inflationary pressures, it’s important to remember the labor market is still very tight and unemployment very low,” says John Gulnac, vice president at Adecco. “There’s an emphasis on retention strategies and taking stock of the talent they’ve acquired.”
“It feels like inflation is giving a pause for companies to take stock and get new employees acclimated,” Gulnac added.
But there is no doubt the economy has entered a new phase that consumers and businesses may well have to accept.
“2020 marked the end of a 40-year trend toward steadily falling inflation expectations,” Gargi Chaudhuri, BlackRock head of iShares investment strategy, Americas, wrote on Monday.
“Recent survey data show longer-term inflation expectations have surged to their highest levels in 14 years,” She wrote. “While we still expect cyclical inflation pressures to abate through tighter monetary policy and slower growth, we think inflation will be higher and more persistent in the past.”