Updated Jul 13, 2022 - Economy

America's inflation problem gets worse

Data: Bureau of Labor Statistics; Chart: Axios Visuals

Another month, another terrible inflation report. There's no way to put a positive gloss on the atrocious numbers.

Why it matters: Price increases show no signs of slowing. That will add urgency to the Federal Reserve's aggressive campaign to cool inflation by raising interest rates — heightening the odds the central bank steers the economy into recession.

  • The Consumer Price Index rose 1.3% in June alone, bringing the last year's price gains to a sizzling 9.1% — the fastest annual pace since November 1981.
  • Energy prices were responsible for more than half of the monthly gains in headline inflation, with gasoline prices rising over 11% last month. That's no surprise, considering prices at the pump reached historic levels.

Between the lines: The Biden administration is emphasizing good news outside the scope of the report, noting that commodity prices have come down this month, which should cool future months' readings.

  • "While this print is to be taken seriously, and this is hard on American families, it is backward-looking, and we have seen some pretty important declines in energy prices over the past few weeks," Heather Boushey, a member of the White House Council of Economic Advisers, tells Axios.

But there are troubling signs in the report beyond the sharp rises in food and energy prices. The "core index" — which strips those volatile factors out — is rising fast.

  • Core inflation reaccelerated to 0.7% in June after two months of holding a tick below that level.
  • Over the last three months, core CPI rose at an annualized rate of 7.9%. High inflation is becoming embedded even in sectors of the economy with minimal connection to energy prices.

Shelter costs were a key factor pushing up the index: Rent rose 0.8%, the biggest monthly increase since 1986. Owners' equivalent rent rose 0.7%.

  • But the price hikes were broad-based, which will add to the sense of alarm at the Fed. Car insurance prices rose 1.9% in June and are up 6% over the last year. Medical care was up 0.7% in June, and 4.8% over the last year.

The big picture: This report makes it all but certain that the Fed will raise interest rates by another .75 percentage points at its meeting later this month. It also raises the likelihood that rate hikes of that magnitude may not be over — and that an even larger one could be on the table.

  • "The July Fed decision will probably be a 0.75 percentage point hike, and if not that, a full percentage point increase looks likelier than a half percentage point one," wrote Bill Adams, chief economist of Comerica Bank, in a note.
Source: Bureau of Labor Statistics; Chart: Axios Visuals

Worth noting: High inflation is causing the sharpest decline in real wages in decades. Even in a robust jobs market, the typical worker ends up financially worse off with every month that passes.

  • Since December, average hourly earnings for private-sector workers are up 2.2%. That normally wouldn't be too shabby for a six-month period, except that consumer prices rose 5.4% in that span.
  • Over the last 12 months, the average pay for non-managerial workers was down 2.7% after subtracting CPI inflation. That was the steepest drop since 1980 (except for a single month at the start of the pandemic, when data was distorted).
  • There's been some debate about why public opinion on the economy is sharply negative despite a very healthy job market. The data on real wages makes it not much of a mystery at all.

The bottom line: The inflation report was an ugly one for the Fed, the White House and consumers — who all want to see inflation coming down in a meaningful way.

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