US annual consumer inflation registers largest increase since 1981

  • Consumer Price Index rose 1.3% in June
  • Year-over-year CPI rises 9.1%, the biggest gain since 1981
  • Core CPI increases 0.7%; A year-on-year increase of 5.9%

WASHINGTON, July 13 (Reuters) – U.S. annual consumer prices rose 9.1% in June, the biggest increase in more than four decades, prompting Americans to dig deeper to pay for gasoline, food, health care and rent and the Federal Reserve being more assertive. A further 75 basis points hike in interest rates is expected at the end of the month.

The Labor Department reported a larger-than-expected year-over-year increase in the consumer price index, reflecting higher prices for a range of other goods and services, including motor vehicles, clothing and home furnishings. The CPI rose the most in nearly 17 years on a monthly basis.

Inflation data followed stronger-than-expected jobs growth in June and the US Federal Reserve’s aggressive monetary policy stance has so far made little progress in curbing demand and reducing inflation to its 2% target. As rents hit a 36-year high, inflation may stabilize.

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Although a global problem, stubbornly high inflation is a political risk for US President Joe Biden and his Democratic Party heading into congressional elections in November.

“Despite the Fed’s best intentions, the economy appears to be moving into a hyperinflationary regime,” said Christopher Roepke, chief economist at FWDBONDS in New York. “Fed Still Behind the Curve After Today’s Sizzling Report.”

The consumer price index rose 1.3% last month, the biggest monthly gain since September 2005 after a 1.0% advance in May. A 7.5% increase in energy prices accounted for almost half of the increase in CPI. Petrol prices rose 11.2% after rising 4.1% in May. Prices at the pump have fallen significantly from record highs in June.

Natural gas prices rose 8.2%, the most since October 2005. Prices of food consumed at home rose 1.0%, marking the sixth straight monthly increase of at least 1.0%.

In the 12 months to June, CPI rose 9.1%. It was the biggest gain since November 1981 and followed an 8.6% rise in May. Economists polled by Reuters had forecast the CPI to rise 1.1%, up 8.8% year-on-year.

At the start of the Covid-19 pandemic, consumer prices have been on the rise, driven by massive financial stimulus from global supply chains and governments.

The ongoing war in Ukraine has exacerbated the situation, raising global food and fuel prices.

President Biden sought some solace when gasoline prices averaged more than $5 a gallon since June, according to data from motorist advocacy group AAA. They averaged $4.631 a gallon on Wednesday, which should ease the pressure on consumers.

“Those savings provide important breathing room for American families,” Biden said in a statement. “Also, other commodities such as wheat have fallen sharply since the report.”

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

Financial markets are widely expecting the central bank to raise its policy rate by 75 basis points at its July 26-27 meeting. A full percentage-point increase has not been ruled out and is now the focus of Friday’s University of Michigan consumer inflation expectations survey.

The Bank of Canada on Wednesday surprised by raising its policy rate by 100 basis points, the most since 1998. read more

The central bank has raised overnight interest rates by 150 basis points since March.

US stocks were mixed. The dollar fell against a basket of currencies. US Treasury prices rose.

Under inflation

The economy added 372,000 jobs in June, with broad-based unemployment hitting record lows. read more

It was hoped that shifting spending from goods to services would help reduce inflation. But a much tighter labor market pushes up wages and adds to higher prices for services.

Core inflation pressures eased last month. Excluding volatile food and energy components, CPI gained 0.7% in June after rising 0.6% in May. Rent prices, known as core CPI, rose 0.8%, the biggest monthly increase since April 1986.

Rent is one of the biggest and stickiest categories of inflation, raising the risk that the central bank will maintain its aggressive rate hikes in the second half of the year.

“We have miles to go before prices return to anything resembling stability,” said Sarah House, senior economist at Wells Fargo in Charlotte, North Carolina.

The prices of new vehicles continued to rise, as did the prices of used cars and trucks. Motor vehicle maintenance and repair costs rose 2.0%, the most since September 1974. Health care costs increased by 0.7% with a record increase in the cost of dental services.

Clothing prices rose 0.8% despite retailers like Walmart (WMT.N) and target (TGT.N) Reporting excess inventory requiring discounts. But hotels, car rentals and airfares have come down. However, prices of core goods rose a strong 0.8%, while services rose 0.7%.

Core CPI rose 5.9% in the 12 months to June. This marked the third consecutive monthly decline, following a 6.0% rise in the 12 months to May.

High inflation is eroding wage gains, which, along with rising borrowing costs, could dampen consumer spending, with economists expecting a mild slowdown at the start of the year. Average weekly earnings adjusted for inflation fell 1.0% in June.

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Report by Lucia Muticani; Editing by Chisu Nomiyama and Paul Shimao

Our Standards: Thomson Reuters Trust Principles.

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