Soaring prices in May hit President Biden, highlighting the major challenges facing the Federal Reserve as inflation, which many economists expected to show signs of chilling.
Consumer prices rose 8.6% year-on-year, up 1% from April. This is a faster than expected by economists, a monthly rise that is about three times the previous pace. The rise partially reflected rising gas costs, but even after removing volatile food and fuel prices, the rise was 0.6%, at a vigorous monthly rate consistent with April measurements. did.
The Consumer Price Index report on Friday provided a reason for more worry than comfort for federal officials watching signs of inflation chilling every month as it seeks to return inflation to its target. A variety of products and services, such as rent, gas, used cars and food, have risen sharply, suggesting that this inflation is painful for consumers and may be able to sustain their strength. Policy makers Different but related indexesThis is also rising.
The fast pace of inflation increases the likelihood that the Fed, which is already trying to cool the economy by raising borrowing costs, will move more aggressively and will have to do some pain to ease consumer and corporate demand. .. Central banks are widely expected to raise interest rates by 0.5 percentage points at meetings next week and July. However, Friday’s data urged many economists to raise another significant rate hike in September. A more active Fed will increase the likelihood of a significant recession or recession.
“It suggests that the Fed has more work to do to reduce inflation,” said Laura Rossner-Warburton, senior economist at Macro Policy Perspectives. “It was overall strong, unfocused and higher than we expected.”
After the Ministry of Labor released the report, markets that were nervous about the Fed’s policy path and increased risk of recession fell. S & P 500 fell 2.9%. Yields on short-term government bonds, which are benchmarks for borrowing costs, have skyrocketed, with yields on two-year government bonds reaching 3.06%, the highest level since 2008.
High inflation and the Fed’s attempts to curb it have contributed to the economic downturn. Consumer confidenceHouseholds have been sunk since last year with a high burden. New low In the report on Friday. President Biden’s approval rating is also declining, Wall Street Economist When Small business owner I am more and more worried about the possibility of a recession next year.
As the November midterm elections approach, its moody attitude and the fact that inflation shows few clear signs of decline poses problems for Mr Biden and the Democrats. Although rising prices put pressure on voters’ wallets and minds, policymakers throughout the administration have made it clear that helping inflation return to a more sustainable pace is their top priority. , It is largely up to the Fed to do so.
Economists warn that tackling lower inflation can be a slow and painful process. Pandemic-related production and shipping growls show early signs of mitigation, As pronounced, Shortage of products such as cars and trucks. The war in Ukraine is raising food and fuel prices, and its trajectory is unpredictable. And consumer demand remains strong, supported by the savings accumulated during the pandemic and wages, which are not enough to completely offset inflation, but are rising strongly.
Understand inflation and its impact on you
Sarawat House, Senior Economist at Wells Fargo, said: “There is little easing of inflation.”
In a post-release statement, Biden said the numbers emphasized why inflation is his number one priority, while emphasizing that prices are rising around the world.
“My administration will continue to do everything it can to lower the prices of Americans,” he said in a statement. “We all have something to do to reduce inflation.”
But inflation control is primarily the Fed’s job, and Friday’s figures show that the Fed will be in the coming months, even if key Fed policy makers have shown little willingness to make such dramatic moves. It has strengthened speculation that it could raise interest rates by 0.75 percentage points.
“The US central bank believes there is good reason to surprise the market by raising rates more aggressively than expected in June,” a Barclays economist said after the announcement.
The chorus of speculation shows how harsh consumer price news is, especially paired with evidence of rising inflation expectations. measures Preliminary data released on Friday show that households are one of the places where they expect prices to reach their highest prices since 2008 in five years.
Fed officials may carefully analyze Friday’s report for hints on what will happen next. Most of the price acceleration in May is due to the continued rise in prices of key goods. The cost of used cars, which economists expected to ease or even fall, instead rose sharply, up 16.1% year-on-year. New car prices have risen 12.6%.
This jump was also triggered by a pandemic-affected industry such as travel.After years of being trapped in the house, people are taking vengeful vacations, and airfares have risen. 37.8% From a year ago. Hotel room rates are 22.2% higher than in May last year.
And the war in Ukraine clearly affected inflation. Food costs are rising rapidly amid supply chain roars and fertilizer shortages, and Russia’s invasion has exacerbated the situation by disrupting Ukraine’s grain transport in a way that bounces off the global market. Gas prices are also rising sharply, starting before the invasion, but intensifying because of it.
While these trends in goods, pandemic-affected categories, and war-driven prices may eventually begin to reverse naturally, Friday’s report also showed signs of a more tenacious type of inflation. rice field.
Inflation FAQ
What is inflation? Inflation is the loss of purchasing power over time. So tomorrow the dollar won’t fall as much as it does today. This is usually expressed as an annual change in the prices of daily necessities and services such as food, furniture, apparel, transportation and toys.
Rents are still rising sharply, accelerating the measurement of rent-related housing costs for homeowners. The housing index accounts for about one-third of total inflation and generally moves slowly, which could put ongoing pressure on inflation over the next few months.
In fact, the recent surge in rents for new leases tracked by private data providers means that housing costs will probably continue to rise for some time as lessees renew or move and face higher market costs. To do. There is also the risk that higher mortgage rates will prevent people from buying homes and put pressure on the supply of apartments.
Igor Popov, Chief Economist on the Apartment List, said:
Some details of the new data may provide the Fed and the White House with a faint light of hope. Some commodity prices, which had risen in the shortage last year, are now falling. Audio and visual products like TVFor example, it’s getting cheaper again. And a gauge that does not include core inflation, food and energy costs, From 6%, 6.2% on an annual basis last month.
However, the slowdown is partly due to the fact that the numbers were measured against the high measurements last year. Inflation surged in May 2021.Due to this so-called basic effect, the price is Climb steadily By month.
Overall, the report was disappointing for policy makers, emphasizing that they are cutting jobs for them as consumer and business demand remains strong. The White House has come up with policies that may help families with inflation by improving supply and offsetting costs. Almost completely to the central bank.
So far, spending shows few signs of cracking. For example, travelers will continue to book their trips, even if vacation costs skyrocket.
Anthony G. Capuano, CEO of Marriott International, said in an event with analysts on Tuesday that “the resilience of travel is truly amazing,” and later the hotel company “extraordinary pricing power.” I added that I was watching.
This may be due to households accumulating large savings over the past few years. First stayed at home in a pandemic, then the government sent checks and other relief money in 2021. Create a checking accountFor wealthier households, the balance remains significantly higher.
Deutsche Bank’s chief US economist, Matthew Luzetti, estimates that households still have about $ 2.3 trillion in surplus savings.Wages are not keeping up with inflation — average hourly wages 5.2 percent increase In the year leading up to May, there weren’t enough price increases, but these cash buffers could help families spend higher prices and interest rates.
Result is? When it comes to headline inflation, “the peak is still in front of us,” said Wells Fargo’s House.
Lydia Depiris When Anna Swanson Report that contributed.