US inflation hits 9.1% in June putting further pressure on the Fed

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US consumer prices rose more than forecast in June, hitting an annual pace of 9.1 per cent, a fresh 40-year high that cements expectations of another historically large 0.75 percentage point Federal Reserve interest rate rise this month.

The consumer price index published by the Bureau of Labor Statistics on Wednesday further accelerated last month, above economists’ estimates for an 8.8 per cent increase. It marked the fastest year-over-year increase since November 1981.

Prices jumped another 1.3 per cent month on month in June, following a 1 per cent rise in May.

Once volatile items like food and energy are stripped out, “core” inflation increased 0.7 per cent, compared with May’s 0.6 per cent advance. That translated to an annual increase of 5.9 per cent, roughly in line with the 6 per cent pace reported the month earlier.

The data will spur the US central bank’s efforts to restore price stability, which dramatically intensified last month after officials abandoned previously-laid plans to deliver a half-point rate rise and instead implemented the first 0.75 percentage point increase since 1994.

Policymakers have also signalled their intent to raise rates to a level — estimated to be around 3.5 per cent — that begins to restrain economic activity by the end of the year. They are seeking to maintain an aggressive approach to tightening monetary policy until there is evidence that monthly inflation readings are decelerating towards a pace more consistent with the Fed’s 2 per cent target.

Treasury yields jumped following the inflation report, with the yield on the two-year note, which moves with interest rate expectations, reaching its highest level since late June. It steadied at 3.2 per cent.

Following the report, futures markets priced in a roughly 30 per cent chance of a 1 percentage point increase in July. But the consensus remains that the Fed will raise rates by 0.75 percentage points, the same size increase as in June.

The monthly inflation gains were “broad-based”, according to the BLS, but a 7.5 per cent increase in the energy index contributed to nearly half of the jump in headline inflation. Petrol prices alone rose 11.2 per cent in June, while food prices were up 1 per cent. Prices for new and used vehicles continued their ascent, rising 0.7 per cent and 1.6 per cent, respectively.

In a worrisome sign, services inflation, excluding-energy, climbed 0.7 per cent on a monthly basis and was up 5.5 per cent compared to the same time last year. Shelter-related costs drove a significant portion of the increase, rising 0.6 per cent for the month or 5.6 per cent on a year-over-year basis. That is the biggest annual increase since February 1991. Prices for transportation services and medical care also increased.

One outlier was airline fares, which slid 1.6 per cent following two months of double-digit growth.

The Biden administration, whose popularity has plummeted against the backdrop of soaring inflation, this week sought to get ahead of June’s high figure and played down the acceleration, emphasising that the data covered a period prior to a sharp drop in prices for energy and other commodities.

Brent crude, the international oil benchmark which had climbed to almost $140 a barrel in early March following Russia’s invasion of Ukraine, this month slumped below $100 a barrel. Food prices globally have also moderated from historic highs.

On Tuesday afternoon, a fake version of the June report circulated online stating that prices had risen at an annual rate of 10.2 per cent, forcing the Bureau of Labor Statistics to publicly discredit it.

Should the Fed raise rates by another three quarters of a percentage point at its July meeting, as expected, the target range of the federal funds rate will rise to 2.25 to 2.50 per cent.

Alongside these actions, which include shrinking its $9tn balance sheet, the Fed has stepped up its rhetoric about not only its “unconditional” commitment to lowering inflation, but also what it is willing to risk in terms of the economic recovery to do so.

While labour demand has remained extremely strong, with another 372,000 jobs created last month alone, economists fear that momentum will soon ease as the US economy hurtles towards a recession at some point next year.

The Fed has already begun to acknowledge unemployment will need to rise, with officials most recently forecasting joblessness to inch up from the current historically low level of 3.6 per cent to just above 4 per cent by the end of 2024.

Many economists believe a more accurate estimate is in the vicinity of 5 per cent, translating to significantly more job losses.

Additional reporting by Kate Duguid in New York

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