No matter what the federal government does, inflation keeps rising with no clear end in sight.
Consumer prices jumped 1.3 percent higher in June and a whopping 9.1 percent over the past 12 months, according to data released Wednesday by the Labor Department, despite the best efforts of the Biden administration and Federal Reserve to bring inflation down.
While a June surge in gas prices was responsible for much of the overall increase in inflation, prices grew across almost every sector. That’s a troubling sign for the U.S. economy after the federal government scrambled to stop the highest annual inflation in more than four decades from getting worse.
“It’s going to be a long and tough road ahead. This is not going to come down very quickly,” said Derek Tang, co-founder and economist at research firm Monetary Policy Analytics.
“The hope was that inflation would start coming down on its own, but it looks more and more like it’s not going to happen. That’s why there’s so much worry,” Tang added.
After waiving off the threat of inflation for much of 2021, the Biden administration and Fed pivoted sharply toward bringing prices down.
The Fed began raising its baseline interest rate in March in a bid to slow the economy enough to bring down inflation without causing a severe economic downturn.
But as inflation has steamed ahead, the Fed has hiked rates at an even faster pace. The bank in March boosted rates by 0.25 percentage points, followed by a 0.5 percentage point hike in May and a 0.75 percentage point hike in June — the largest single increase since 1994.
The Fed also ceased its monthly purchases of Treasury and mortgage bonds and will soon allow its holdings to expire, which will pull billions of dollars out of financial markets and into the central bank each month.
The Fed’s goal is to boost borrowing costs enough to make consumers spend less money and keep businesses from raising wages at ever faster rates. Slower economic activity is meant to bring demand for goods and services down to levels businesses can afford to meet without raising prices.
But according to experts, Americans have pent-up energy and money to spend on activities that they missed out on during the height of the pandemic.
“There is still a lot of pent-up demand in the economy, especially around leisure, hospitality and tourism, as people appear prepared to run down accumulated savings and pay higher prices to do things they missed out on over the past couple of years,” wrote James Knightley, chief international economist for ING, in a Wednesday analysis.
“To get inflation meaningfully lower quickly we need demand to better match the supply capacity of the economy. Ideally this would come via the supply channel,”
Knightley added.High inflation is often caused by a mismatch between the goods and services that consumers and businesses want to buy and the economy’s ability to supply them.
Prices for many manufactured goods rose rapidly through most of the COVID-19 pandemic as households shifted their spending — fueled by federal stimulus packages — toward items to keep them entertained and safe because of public health concerns. Supply chain disruptions, shipping delays, material shortages, port backlogs and hiring issues also made many factory goods more expensive and harder to get.
The Fed held off on raising interest rates last year over concerns they would upend the recovery to fight inflationary pressures that officials believed would fade with the pandemic.
Economists were also expecting consumers to shift spending away from goods and toward services they were unable to enjoy during lockdown.
It didn’t shake out that way.
The housing market has declined, and stock prices have fallen rapidly. But consumer spending and job growth have hardly slowed.
Americans are spending more on travel, dining, entertainment and health care, but they’re also spending ample money on goods meant for a return to pre-pandemic activities.
“The problem now is that services inflation has come up because people are going out to eat and going on vacation. But goods inflation hasn’t come down to provide that offset,” Tang said.
And though pandemic-related supply shocks have begun to fade, the war in Ukraine has unleashed serious shocks to global food, energy and commodity prices.
“The past few years have been characterized by a series of economic shocks that have wreaked havoc with just about every area of the American economy,” wrote Joe Brusuelas, chief economist at RSM, in a Wednesday analysis.
An ongoing decline in gas prices will likely take some of the steam out of inflation in July. A 0.7 percent increase in fuel prices drove roughly half of the total June inflation surge, according to Labor Department data. Rising gas prices also push up costs throughout the economy, which means July’s figures will likely see a decline from June’s highs.
In a Wednesday statement, President Biden dismissed the June inflation report as “out-of-date” given the steady decline of gasoline prices throughout the last month. Even so, those supply shocks are far from settled as long as the war in Ukraine rages on.
“Declaring a peak in inflation is a fool’s errand,” Brusuelas said. “While the price of oil has declined on easing global demand, it would not take much to cause a reversal and send those prices back up and inflation higher with it.”
Rising Fed interest rates will eventually cut into inflation in areas unaffected by the war in Ukraine, but economists fear inflation may continue to rise if supply shocks to wheat, oil, natural gas, key commodity metals and fertilizer intensify later in the year.
Though Fed rate hikes can do little on their own to smooth over supply bottlenecks, bank officials say they will continue to hike rates until inflation eases regardless of the risk of a potential recession.
“The Federal Reserve now acknowledges the onus is on them to hit the brakes on demand via higher interest rates. But by delaying their response and now having to move policy faster and deeper into restrictive territory, there is clearly the fear of a recession,” Knightley wrote.
“The Fed has accepted that weaker growth is the price we have to pay to get inflation under control,”
Knightley added.Fears of a Fed-induced recession are also boosting pressure on the Biden administration to take more action to address supply chain issues.
The president has signed a bill meant to prevent shipping companies from jacking up rates, which experts say is just one source of goods inflation, and has begun selling oil from the Strategic Petroleum Reserve to fill the void created by sanctions on Russia.
But Biden and the fossil fuel industry are also in a public feud over whether oil companies are doing enough to expand refining capacity, which has been maxed out by the intense global need for oil products.
“There’s a little bit of crosstalk there, and some of it is political,” Tang said.
“At the very least I think that doesn’t give the public a lot of confidence that this will be dealt with quickly,” Tang added.
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