Over the past 15 months, inflation has increased at a breakneck pace. In February 2020, inflation was only 1.7%. But on Wednesday, the Labor Department reported that in June the country’s inflation rate jumped to 9.1%, a new 40-year high dating back to November 1981. That beat Wall Street forecasts by 8, 8% and was higher than the reported rate of 8.6%. in May.
This means that consumer prices have, on average, increased by 9.1% over the past 12 months. In June alone, consumer prices rose 1.3%, the largest monthly increase since March 1990. Very few consumer goods and services were spared the price increase, especially essential products. Costs for food, clothing, housing and energy have all skyrocketed.
Over the past 12 months, food prices have risen 10.4%, the largest annual increase since November 1981. In June, food prices rose 1% from May. Annual price increases for some of the most common food items include chicken (18.6%), eggs (33.1%), milk (16.4%) and bread (10.8%) . For you coffee lovers, the price of coffee has increased by 15.8% over the last year.
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Clothing prices rose 5.2%. Housing costs also continue to soar. The Department of Labor defines housing as the cost of rent or, for landlords, the equivalent cost that landlords would pay if they rented their dwelling. Over the past year, the cost of housing has risen 5.6%, the largest annual increase since February 1991.
Energy prices have risen 41.6% over the past 12 months, the largest annual increase since April 1980. In June, energy prices rose 7.5%. In the energy sector, a gallon of regular gasoline is up 61.1% over the past year, while natural gas is up 38.4%. For those planning to go on vacation in the near future, airline fares are now 34.1% higher than a year ago.
High inflation has decimated the budget of many households. Inflation is having a disproportionate impact on retirees and low-income households, but the impact is increasingly affecting many middle-class Americans. According to a study recently published by Moody’s Analytics, inflation costs the average American household an additional $493 per month ($5,916 per year) in higher costs.
The June inflation data raises the likelihood that the Federal Reserve will keep its foot on the accelerator by raising the benchmark federal funds rate, which is often the basis for many forms of consumer debt. As the federal funds rate rises, it typically raises interest rates on credit cards, bank loans, and mortgages, among other things. The Fed’s objective is to discourage consumer spending. A drop in demand for goods and services should help temper the continued rise in prices.
The Fed raised the federal funds rate from nearly 0% in March to its current rate of around 1.75%. At its next meeting on July 27, the Fed is expected to raise the federal funds rate even further. Wall Street currently forecasts a 57% chance of a 0.75% rate hike and a 43% chance of a full 1% hike at the next meeting.
All of these interest rate hikes in such a short, compressed time frame are putting enormous pressure on the US economy. Not surprisingly, as inflation continues to rise, so do concerns that the economy is entering recession.
Mark Grywacheski is an expert in financial markets and economic analysis and is an investment advisor at Quad-Cities Investment Group, Davenport.
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