U.S. inflation quickens to 9.1%, amping up Fed pressure to go big

U.S, inflation roared again to a fresh four-decade high last month, likely strengthening the Federal Reserve’s resolve to aggressively raise interest rates that risks upending the economic expansion.

The consumer price index rose 9.1% from a year earlier in a broad-based advance, the largest gain since the end of 1981, Labor Department data showed Wednesday. The widely followed inflation gauge increased 1.3% from a month earlier, the most since 2005, reflecting higher gasoline, shelter and food costs.

Economists projected a 1.1% rise from May and an 8.8% year-over-year increase, based on the Bloomberg survey medians. This was the fourth-straight month that the headline annual figure topped estimates.

The so-called core CPI, which strips out the more volatile food and energy components, advanced 0.7% from the prior month and 5.9% from a year ago, above forecasts.

The S&P 500 index opened lower while shorter-term Treasury yields rose and the dollar strengthened.

The red-hot inflation figures reaffirm that price pressures are rampant and widespread throughout the economy and taking a bigger toll on real wages, which are down the most ever in data back to 2007. The inflation data will keep Fed officials on an aggressive policy course to rein in demand, and adds pressure to President Joe Biden and congressional Democrats whose support has slumped ahead of midterm elections.

Risks Ahead

Several factors such as housing stand to keep price pressures elevated for longer. Geopolitical risks including Covid lockdowns in China and Russia’s war in Ukraine also pose risks to supply chains and the inflation outlook.

“Rather than cooling down, inflation is heating up,” Sal Guatieri, senior economist at BMO Capital Markets, said in a note. “While a pullback in gasoline costs in July and reported retail discounting will help tamp down the flames, the broad pressure in the core rate, led by plenty of inertia in rents, suggests inflation may not peak for a while, and might remain stubbornly high for longer than anticipated.”

Fed policy makers have already signaled a second 75 basis-point hike in interest rates later this month amid persistent inflation as well as still-robust job and wage growth. Even before the data were released, traders had already fully priced in such a move. Now, they also see around a one-in-three chance that it could be a full percentage point.

The higher and faster that the Fed goes increases the risks for a potential U.S. recession, which several economists see in the next 12 months. Even so, the labor market has held strong, adding nearly 400,000 jobs last month.

Prices for household necessities continued to post outsized increases last month. Gas prices rose 11.2% in June from a month earlier. Prices for energy services, which includes electricity and natural gas, increased 3.5%, the most since 2006.

Biden is traveling to the Middle East this week to discuss energy output with Saudi and other Gulf leaders in hopes of lowering high prices at the pump. Retail gas prices topped $5 on average nationwide in June, though they’ve since subsided somewhat.

Food costs, meanwhile, climbed 1% and 10.4% from a year ago, the largest increase since 1981.

Early earnings results from PepsiCo Inc. show some companies are still successfully passing through recent price surges in commodities. The maker of Fritos and Mountain Dew was able to charge customers about 12% more on average in the second quarter. Even so, the company said volumes have held up well.

The cost of goods rose 2.1% from May while a 0.9% increase in services costs was the largest in more than 21 years. Economists have been expecting consumers to rotate their spending from goods to services as Covid-related concerns fade, but goods prices so far are still elevated.

There’s reason to believe that food and energy costs are subsiding, according to Wells Fargo & Co. economists. Particularly for groceries, “we suspect more significant easing ahead as raw material, transportation and wage costs have started to cool,” they said in a note.

Rents, Shelter

Rent of primary residence rose 0.8% from May, the largest monthly advance since 1986. Owners’ equivalent rent increased 0.7%, the most in nearly 32 years.

While home sales have slowed in recent months due to higher mortgage rates, economists expect rental inflation to continue to increase because it takes time for price changes to feed into the CPI.

The cost of hotel and airline fares, as well as car rentals, fell from May to June, following historic increases in recent months. Even so, recent commentary from US airlines have indicated that travel demand remains strong.

Used car prices, which were a major contributor to inflation last year, rose 1.6% from a month ago, while new vehicle prices increased 0.7%.

Higher prices continue to eat away at consumer incomes, despite strong nominal wage gains. Inflation-adjusted average hourly earnings dropped 3.6% in June from a year earlier, the 15th straight decline and largest in data back to 2007, separate data showed Wednesday. That’s started to impact spending -- inflation-adjusted consumer expenditures fell 0.4% in May, the first decline this year.