US consumer prices surge to new 40-year high of 9.1 percent

By News Desk

WASHINGTON: US consumer prices surged 9.1 percent in June, the largest annual increase in more than four decades amid stubbornly high costs for gasoline, food and rent, cementing the case for another 75-basis-point interest rate hike by the Federal Reserve this month.

The larger-than-expected increase in the year-on-year consumer price index reported by the Labor Department on Wednesday also reflected higher prices for healthcare, motor vehicles, apparel as well as household furniture. The CPI increased by the most in nearly 17 years on a monthly basis.

The inflation data followed on the heels of stronger-than-expected job growth in June and suggested that the Fed's aggressive monetary policy stance had made little progress so far in cooling domestic demand and bringing inflation down to its 2 percent target.

Inflation numbers are heaping pressure on President Joe Biden, whose approval ratings have taken a battering from the relentless rise in prices.

While acknowledging the inflation rate was "unacceptably high," Biden argued that it was also "out of date" as it did not reflect a clear drop in energy prices since mid-June.

The recent price drop had provided "important breathing room for American families. And, other commodities like wheat have fallen sharply since this report," the president said in a statement.

Insisting that tackling inflation was the top priority, Biden admitted his administration needed "to make more progress, more quickly, in getting price increases under control."

"Despite the Fed's best intentions, the economy looks to be moving into a higher inflation regime," said Christopher Rupkey, chief economist at FWDBONDS in New York. "The Fed is even further behind the curve after today's sizzling report."

The consumer price index increased 1.3 percent last month, the biggest monthly gain since September 2005, after advancing 1.0 percent in May. A 7.5 percent surge in energy prices accounted for nearly half of the increase in the CPI. Gasoline prices jumped 11.2 percent after rebounding by 4.1 percent in May.

Natural gas prices rose 8.2 percent, the most since October 2005, while the cost of electricity increased 1.7 percent. Food prices gained 1.0 percent. The cost of food consumed at home rose 1.0 percent, posting the sixth straight monthly increase of at least 1.0 percent.

The US central bank last month implemented the biggest rate hike in nearly 30 years, and economists say another three-quarter-point increase is likely later this month.

Ian Shepherdson of Pantheon Macroeconomics summed up the data in one word: "Ouch."

"This report will make for very uncomfortable reading at the Fed," he said. "It rules out the chance of the Fed hiking by only 50bp this month."

But Shepherdson noted some signs of cooling prices in the data and predicted "this will be the last big increase."

In the 12 months through June, the CPI jumped 9.1 percent. That was the biggest gain since November 1981 and followed an 8.6 percent rise in May. Economists polled by Reuters had forecast the CPI would rise 1.1 percent and accelerating 8.8 percent year-on-year. Consumer prices are surging, driven by snarled global supply chains and massive fiscal stimulus from governments early in the Covid-19 pandemic.

The ongoing war in Ukraine, which has caused a spike in global food and fuel prices, has worsened the situation.

The Bank of Canada on Wednesday announced a full-percentage-point increase in its policy rate, a super-sized hike last seen in 1998.

U.S. gasoline prices hit record highs in June, averaging above $5 per gallon, according to data from motorist advocacy group AAA. They have since declined from last month's peak and were averaging $4.631 per gallon on Wednesday, which could ease some of the pressure on consumers.

U.S. stocks opened lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.

The government reported last Friday that the economy created 372,000 jobs in June, with a broader measure of unemployment falling to a record low.

Labor market tightness is also underscored by the fact that there were nearly two jobs for every unemployed person at the end of May. Financial markets overwhelmingly expect the U.S. central bank to raise its policy rate by 75 basis points at its July 26-27 meeting. The Fed has hiked its overnight interest rate by 150 basis points since March.

Annual food prices are rising at their fastest pace since February 1981, with energy prices posting their largest jump in more than 42 years.

There had been hope that a shift in spending from goods to services would help cool inflation. But the very tight labor market is boosting wages, contributing to higher prices for services.

Underlying inflation pressures remained strong last month. Excluding the volatile food and energy components, the CPI gained 0.7 percent in June after climbing 0.6 percent in May. The so-called core CPI was boosted by the cost of rent, which shot up 0.8 percent, the largest monthly increase since April 1986.

New vehicle prices maintained their upward trend as did those for used cars and trucks. The cost of motor vehicle maintenance and repairs surged 2.0 percent, the most since September 1974. Healthcare costs rose 0.7 percent, with a record increase in the cost of dental services. Apparel price increased 0.8 percent, despite retailers saying they would have to offer discounts because of excess inventory.

The core CPI increased 5.9 percent in the 12 months through June. That followed a 6.0 percent rise in the 12 months through May. High inflation and rising borrowing costs are stoking fears of a recession by early next year.