Rising gas, food and rent prices pushed US inflation to a new four-decade high in June, further squeezing households and likely sealing the case for another big rate hike by the Federal Reserve, at a higher cost lending to follow. Consumer prices rose 9.1 percent from a year earlier, the government said Wednesday, the biggest annual increase since 1981 and up from an 8.6 percent jump in May. From May to June, prices rose 1.3 percent, another huge increase, after prices had risen 1 percent from April to May. The persistent acceleration of prices has underscored the brutal effect inflation has had on Americans, with the cost of necessities, in particular, rising far faster than average income. Low-income and black and Hispanic Americans have been hit particularly hard because a disproportionate share of their income goes toward necessities like housing, transportation, and food. Bank of Canada raises key rate by 1 percentage point, surprising markets with biggest move since 1998 Rising inflation has dented consumer confidence in the economy, dented President Joe Biden’s approval ratings and posed a major political threat to Democrats in November’s congressional elections. Forty percent of adults said in an AP-NORC poll in June that they think tackling inflation should be a top government priority this year, up from just 14 percent who said so in December. The rise in U.S. inflation was sparked by a rapid recovery from the 2020 pandemic recession, spurred by massive federal aid, ultra-low Fed interest rates and restrained spending fueled by savings built up during the U.S. shutdown. country. As Americans channeled their shopping toward home goods such as furniture, appliances and exercise equipment, supply chains snarled and commodity prices soared. In recent months, as consumer spending has gradually shifted away from goods and towards services such as holiday travel, restaurant meals, movies, concerts and sporting events, the resulting higher demand has also fueled high services inflation. Some economists hold out hope that inflation may have reached or is nearing a near-term peak. Natural gas prices, for example, have fallen from an impressive $5 a gallon in mid-June to a national average of $4.63 on Wednesday — much higher than a year ago, but a decline that could help slow inflation for July and possibly August. In addition, shipping costs and commodity prices have started to drop. Wage increases have slowed. And surveys show Americans’ long-term inflation expectations have softened — a trend that often points to more modest price increases over time. “There may be some relief in the July numbers – commodity prices have run away, at least – but we are far, far from normalizing inflation and there is no tangible sign of downward momentum,” Eric Winograd said. economist at asset manager AB. The range of price gains shows how rising costs have seeped into almost every corner of the economy. Grocery prices have jumped 12.2 percent from a year ago, the steepest climb since 1979. Rents have risen 5.8 percent, the most since 1986. New car prices have risen 11.4 percent from a year earlier. And airline fares, one of the few items to see price declines in June, are still up 34 percent from a year earlier. Energy prices rose by just 7.5% from May to June, accounting for almost half of month-on-month inflation. Natural gas prices have soared nearly 60 percent compared to a year ago. From May to June, the cost of dental services rose 1.9%, the largest one-month increase since record-keeping began in 1995. Excluding volatile food and energy categories, so-called core prices rose 0.7 percent from May to June, the biggest such rise in a year. Compared to 12 months earlier, core prices jumped 5.9%, below a recent peak of 6.4%, but still extremely high. Inflation is soaring far beyond the United States, with 71 million people pushed into poverty in the three months since Russia’s invasion of Ukraine, which further pushed up energy and food prices, according to the UN Development Program last week. The economic toll of the war was particularly severe in Europe, with its dependence on Russian oil and gas squeezing businesses and consumers with much higher bills for utilities, groceries, gasoline and more. Inflation hit a decade high of 8.6% last month in the 19 countries that use the euro and 9.1% in the UK in May. Economists and markets fear a European recession is more likely than in the US, particularly as Russia has cut flows of natural gas that generate electricity and keep factories humming. With thousands of sanctions already imposed on Russia to cripple its economy, the US and its allies are working on new measures to starve the Russian war machine while preventing the price of oil and gasoline from soaring to levels that would they could crash the world economy. In the United States, Americans feel the pain on a daily basis. Steven C., who works in law enforcement and declined to give his last name, was filling up his car with gas in Burke, Virginia, on Monday. He said the increased prices have led him to shop at cheaper grocery stores and ride his bike whenever he can to save on gas. He and his wife, who works in health care, have also struggled with much higher child care costs, which have jumped from $20 an hour before the pandemic to $40 now, according to some child care services they use. “I didn’t think it would affect me much, but it has,” he said, given that inflation remained at a record high. They have not yet limited travel with their two children, which has been important to them during the pandemic. They feel they need the break from their frontline jobs, which carry a high risk of contracting COVID-19. “It’s costing us a lot of money,” he said, “but we’re not stopping.” With many people out of the market for homes and looking instead to rent, the demand for apartments has driven rental prices beyond affordable levels. The average cost of new leases has jumped 14 percent in the past year, according to real estate firm Redfin, to an average of $2,016 a month. Rents as measured by the government’s inflation index have risen more slowly because they include all rents, including existing leases. However, economists expect the rising cost of new hires to drive the government’s measure of inflation higher in the coming months. The persistence of high inflation has irked Chairman Jerome Powell and other Fed officials, who are engaging in the fastest series of rate hikes since the late 1980s to try to slow price rises. The central bank is expected to raise its key short-term interest rate later this month by three-quarters of a point, as it did last month, with larger rate hikes likely to follow. Powell stressed that the central bank wants to see “necessary evidence” that inflation is slowing before reversing its interest rate hikes. Such data should be a “decline monthly measure of inflation,” Powell said at a news conference last month. Many economists worry that the Fed’s push to quell inflation will force it to tighten credit too aggressively, even as the economy, by some measures, is slowing. Much higher borrowing costs could trigger a recession, possibly by next year. Consumers have started to cut back on spending, home sales are falling as mortgage rates rise and factory output fell in May. Still, consistently strong job growth points to an economy that is still expanding, with little sign of an impending recession. Be smart with your money. Get the latest investment information delivered straight to your inbox three times a week with the Globe Investor newsletter. Sign up today.
