HomeInvestmentInflation Soared in June, Pinching Consumers and Challenging Policymakers

Inflation Soared in June, Pinching Consumers and Challenging Policymakers

Prices surged 9.1 percent in June as consumers faced rapidly rising costs for gas, food and rent, an unexpectedly hot reading and bad news for Americans at a moment when their wages are falling further behind the nation’s soaring cost of living.

The fresh data contained particularly worrying signs for the Federal Reserve, providing evidence that price pressures are broad and stubborn in ways that may make them difficult to wrestle under control.

Overall, inflation is likely to moderate in July because gas prices have fallen this month — a gallon of regular gas hit an average of about $5 in June, and the cost is now hovering around $4.63. But fuel prices are volatile and it is impossible to know if today’s lower gas prices will last, and the report suggested that underlying inflation pressures remained intense.

In particular, a core inflation index that strips out food and fuel prices to give a sense of the broad trend remained surprisingly high. It climbed 5.9 percent in the year through June, barely a slowdown from the 6 percent in the previous report, and it climbed 0.7 percent from May to June, more than the previous monthly increase.

The heady inflation figures spelled trouble for President Biden, whose approval ratings have taken a hit amid climbing prices, and could elicit a forceful response from the Fed. The central bank is raising rates to slow the economy and to try to restrain inflation, and it will likely continue adjusting policy quickly — even if doing so risks tipping the economy into a recession — as inflation looks increasingly out of control.

“It’s an ugly report,” said Julia Coronado, the founder of MacroPolicy Perspectives. “I don’t think there is anything good about this report, as far as the Fed is concerned, as far as the U.S. consumer is concerned.”

The global economy has been buffeted by a series of shocks that have pushed inflation higher since the outset of the pandemic. Factory shutdowns and shipping shortages have roiled supply chains, and worker shortages are making it harder for airlines to fly at capacity and for hotels to rent out rooms. Russia’s invasion of Ukraine has disrupted gas and food supplies.

While economic policymakers initially hoped that the disruptions would fade and that prices would ease on their own, they have stopped waiting for that to happen — especially as price increases prove not only pronounced but also widespread, rising rapidly across an array of goods and services.

The Fed has been raising interest rates since March in an effort to slow consumer and business demand, hoping to cool the economy and bring inflation back down. The central bank has sped up those rate moves as price increases have proved surprisingly stubborn, and the new inflation report spurred speculation that the Fed might turn even more aggressive.

Officials lifted rates by 0.75 percentage points in June, the biggest move since 1994, and had been expected to make a similarly sized move at its meeting in late July. But following the release of the new inflation data, investors began to bid up chances of a percentage point move, which would be the biggest move since the 1980s.

The fact that core inflation picked up on a monthly basis is “particularly concerning for the Fed,” said Blerina Uruci, an economist at T. Rowe Price. “It’s sending a broad-based signal: It’s not being driven by one or two volatile components.”

The Fed risks tipping the economy into a recession as it rapidly raises interest rates, because those increases might hit the brakes on the economy so hard that they jar businesses, prompting them to stop hiring and setting off a chain reaction in which households are left with less money to spend.

But policymakers feel that they must choke off inflation quickly even if it increases the chance of a painful slowdown. That’s because they worry that, as inflation remains rapid, consumers and businesses could be getting used to it.

If people begin to ask for higher wages in anticipation of price increases — negotiating cost-of-living adjustments of 6 or 7 percent, for example, instead of the typical 2 to 3 percent — companies could try to pass their swelling labor costs along to customers by raising prices. That could perpetuate rapid inflation, making it much trickier for the Fed to stamp it out.

“The top-line number is a source of concern,” Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, told reporters on Wednesday. “Everything is in play — I have to figure out, work with my team, to really get a sense of what this looks like and what it means in terms of an overall trajectory for inflation.”

Mr. Bostic said that he was “not wedded to any specific course of action.”

Inflation is high across much of the world right now, as Russia’s invasion of Ukraine pushes up food and fuel prices and supply chain issues continue to keep some goods in short supply. But the new inflation report also shows evidence of price pressures that have little to do with global supply. Meals at restaurants, tickets for sporting events and other services are growing more expensive.

For consumers, the fresh report is confirmation that it is increasingly tough to make ends meet. While wages are rising, they have failed to keep up with rapid price increases. After accounting for price increases, they have declined by 3.6 percent over the past year. At the same time, necessities are becoming more expensive. Food prices overall rose 10.4 percent in June from a year earlier, the biggest annual increase since 1981, and food at home rose 12.2 percent — the most since 1979. Rent for a house or an apartment also costs significantly more, having climbed at the fastest monthly pace since 1986.

That is making life difficult for many families. Soaring housing costs have made relocating difficult for Elizabeth Haynes, 41, who lives with her husband in McKinney, Texas. The couple wants to relocate to another state, but high housing costs are so far prohibitive.

“We’re trying to get out of Texas, and that’s proving really difficult with the rental costs and the housing costs and the shortages and all of that,” said Ms. Haynes, who is hoping to land a place she can afford in Connecticut. “So that’s kind of our big pain point.”

As rapid price increases burden many Americans, they are also taking a toll on economic confidence, posing a big challenge for Mr. Biden and Democrats ahead of the midterm elections. Mr. Biden has acknowledged the pain inflation is causing, saying in a statement on Wednesday that it is “unacceptably high.”

But he also called the report “out of date” because it did not capture the recent retreat in prices at the gasoline pump and in other commodities. Democrats have suggested things will soon get better, pointing out that, as fuel costs subside, headline inflation is likely to decline from its 9.1 percent reading in June.

“I think we’re peaking — I think we’re going to be going down from here,” Representative Nancy Pelosi, the House speaker, said when asked for her reaction to the new data.

While there is hope in Washington and on Wall Street that inflation will come down sustainably, economists have repeatedly suggested that inflation has peaked over the past 12 months only to watch it pick back up.

That is partly because certain good prices have behaved strangely: Cars have been in short supply, and their prices have been skyrocketing, for instance. It is also partly because economists have dismissed big price swings in various goods and services as temporary one-offs, and the surprises have just continued to add up.

“People have not done a very good job of predicting car inflation,” said Jason Furman, an economist at Harvard. “Beyond that, inflation is about more than 10 individual stories about 10 individual goods and services — it’s about forces in the overall economy.”

That said, there are some reasons that today’s rapid price gains could abate based on the economy’s fundamentals.

Consumers may struggle to sustain their spending as prices jump. If they move in with roommates, stop taking vacations or pull back on social activities to try to save money, supply could begin to catch up with demand, allowing price gains to decelerate.

Stores including Target are already trying to sell off bloated inventories, which could allow retail prices to slow going forward. Costs for goods including sporting equipment and televisions have already begun to cool.

But, for now, hints at and forecasts for a cool-down are likely to be insufficient comfort for economic policymakers when there is little sign in the data that any concerted pullback is kicking in.

“We have to be so humble about forecasting inflation,” said Ms. Uruci, of T. Rowe Price, who does expect inflation pressures to fade. “We’ve just been so wrong, so consistently, in one direction.”

Reporting was contributed by Isabella Simonetti, Jim Tankersley, Emily Cochrane, Ana Swanson and Joe Rennison.

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