The rise in prices in May hit President Biden and highlighted the huge challenge for the Federal Reserve, as inflation, which many economists expected showed signs of cooling, instead accelerated to climb at its fastest pace since the end of the year. 1981
Consumer prices rose 8.6 percent from a year earlier and 1 percent from April, a monthly increase that was faster than economists had forecast and about three times the previous rate. The rise partly reflects rising gas prices, but even with volatile food and fuel prices falling, the rise was 0.6 percent, a quick monthly rate that is in line with April’s figures.
Friday’s consumer price index report offered more cause for concern than consolation for Fed officials, who are watching for signs that inflation is cooling on a monthly basis as they try to steer price increases back on target. A wide range of products and services, including rent, petrol, used cars and food, are becoming drastically more expensive, making this bout of inflation painful for consumers and suggesting that there may be resilience. Politicians aim for 2 percent inflation over time, using a different but related index that has also risen.
Rapid inflation increases the chances of the Fed, which is already trying to cool the economy by raising borrowing costs, will have to act more aggressively and inflict some pain to calm consumer and business demand. The central bank is expected to raise interest rates by half a percentage point at its meeting next week and again in July. Friday’s figures, however, prompted a number of economists to plan another big rate hike in September. A more active Fed would increase the chances of a significant setback or even a recession.
“This suggests that the Fed has more to do to reduce inflation,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, on inflation data. “He was strong overall, not focused and higher than we expected.
Markets, nervous about Fed policy and the growing risk of a downturn, collapsed after the Department of Labor released the report. The S&P 500 fell 2.9 percent. Yields on short-term government bonds, which serve as a benchmark for borrowing costs, rose sharply, with interest rates on two-year government bonds reaching 3.06 percent, their highest level since 2008.
High inflation and the Fed’s attempts to control it are contributing to deteriorating economic sentiment. Consumer confidence, which has been sinking since last year as households bear the burden of higher prices, has fallen to a new low in a report released on Friday. President Biden’s approval rating has also suffered, and Wall Street economists and small business owners are increasingly worried that a recession is possible next year.
This grim attitude – and the fact that inflation is not showing clear signs of slowing down – is causing problems for Mr Biden and Democrats as the November midterm elections approach. As rising prices weigh on the portfolios and minds of voters, politicians across the administration are clear that helping return inflation to a more sustainable pace is their top priority, but it’s mainly the Fed’s turn.
Economists warn that fighting lower inflation could be a slow and painful process. The production and supplies associated with the pandemic show early signs of relief, but remain clear, maintaining a shortage of products such as cars and trucks. The war in Ukraine raises food and fuel prices and its trajectory is unpredictable. And consumer demand remains strong, supported by savings accumulated during the pandemic and wages rising sharply, albeit insufficiently, to fully offset inflation.
Understand inflation and how it affects you
“Inflation remains relentless – consumers continue to be hit from all sides,” said Sarah Wat House, a senior economist at Wells Fargo. “There is very little relief from inflation.
In a statement after the publication, Mr Biden said the figures underlined why inflation was his top priority, while stressing that prices were rising around the world.
“My administration will continue to do everything possible to reduce prices for the American people,” he said in a statement. “We all have work to do to reduce inflation.”
But controlling inflation is primarily the work of the Fed, and Friday’s figures have boosted speculation that the Fed could raise interest rates by 0.75 percentage points in the coming months – although important Fed politicians have shown little appetite for such a drastic move.
“We believe that the US Federal Reserve now has a good reason to surprise the markets by rising more aggressively than expected in June,” Barclays economists wrote after the announcement.
The chorus of speculation illustrates how bleak consumer price news has been, especially combined with evidence that inflation expectations are rising. The indicator of where households expect prices to be five years later reached its highest level since 2008 in preliminary data released on Friday.
Fed officials are likely to carefully analyze Friday’s report for hints of what may follow. Part of the acceleration in prices in May was due to the continuing rise in commodity prices. The cost of used vehicles, which economists expected to fall or even fall, instead rose sharply, to 16.1% from a year earlier. Prices for new cars rose 12.6 percent.
The jump was also triggered by pandemic-affected industries such as travel. People are going on vacation in revenge after years of staying home, and plane tickets have risen 37.8 percent from a year earlier. The stay at the hotel costs 22.2 percent more than last May.
And the war in Ukraine has clearly affected inflation figures. Food costs are rising rapidly amid supply chain difficulties and a shortage of fertilizers, and Russia’s invasion has exacerbated the situation by disrupting Ukraine’s grain supplies in ways that ricocheted off the world market. Gas prices have also risen sharply, something that began before the invasion but rose because of it.
Although these trends in commodities, pandemic-affected categories and war-induced prices may eventually begin to reverse on their own, Friday’s report also showed signs of a more sticky type of inflation – one that could be more difficult to remove.
Frequently asked questions about inflation
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What is inflation? Inflation is a loss of purchasing power over time, which means that your dollar will not go as far tomorrow as it does today. It is usually expressed as an annual change in the prices of everyday goods and services such as food, furniture, clothing, transport and toys.
What causes inflation? This may be a result of growing consumer demand. But inflation can also rise and fall on the basis of developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? Depends on the circumstances. Rapid price increases lead to problems, but moderate price gains can lead to higher wages and job growth.
Can inflation affect the stock market? Rapid inflation usually creates problems for stocks. Financial assets generally performed poorly during the inflation boom, while tangible assets such as houses maintained their value better.
Rents are still rising sharply, and the rental measure for housing costs for people who own their homes has accelerated. Housing indices account for about a third of total inflation and are generally slow, so they could put continued pressure on inflation in the coming months.
In fact, the recent rise in rents for new leases, followed by private data providers, means that housing costs are likely to continue to rise for some time as tenants renew or relocate and face higher market costs. . There is also a risk that higher interest rates on mortgages will prevent people from buying homes by holding back the supply of apartments.
“The rental market feels very tight: vacancies are very low and therefore rents are rising sharply,” said Igor Popov, chief economist at Apartment List.
A few details in the new data could suggest glimmers of hope for the Fed and the White House. Prices for some goods, which rose last year amid shortages, are now falling: audio and visual products such as televisions are falling again. And core inflation, a measure of non-food and energy costs, slowed to 6 percent year-on-year from 6.2 percent the previous month.
But this slowdown came in part because the figures are now measured against last year’s high readings: inflation rose in May 2021. This so-called base effect makes annual profits look lower, even if prices rise steadily from month to month. .
Overall, the report was discouraging for politicians, and he emphasized that their work had been cut as consumer and business demand remained strong. While the White House is introducing policies that can help families with inflation around the edges by improving supplies or offsetting costs – such as trying to clear the backlog of the port or releasing strategic oil reserves to stifle rising gas prices – the task of cooling of consumption falls almost entirely to the central bank.
So far, the costs do not show any signs of cracking. Even when holiday expenses jump from the charts, for example, passengers continue to book trips.
“The sustainability of the trip is truly remarkable,” said Anthony G. Capuano, CEO of Marriott International, during an event with analysts on Tuesday, later adding that the hotel company sees “exceptional price power.”
This may be due to the fact that households have accumulated large savings over the last few years, first while staying home during the pandemic and later when the government sends checks and other benefits for 2021. While poorer families withdraw their current accounts, balances remain significantly increased for richer households.
Households still have about $ 2.3 trillion in excess savings, …
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