WASHINGTON — U.S. inflation surged to a new four-decade high in June because of rising prices for gas, food and rent, squeezing household budgets and pressuring the Federal Reserve to raise interest rates aggressively – trends that raise the risk of a recession.
Gas prices are displayed at a filling station in Philadelphia on Tuesday. Matt Rourke/Associated Press
The government’s consumer price index soared 9.1 percent over the past year, the biggest yearly increase since 1981, with nearly half of the increase due to higher energy costs.
Lower-income and Black and Hispanic Americans have been hit especially hard, since a disproportionate share of their income goes toward essentials such as transportation, housing and food. But with the cost of many goods and services rising faster than average incomes, a vast majority of Americans are feeling the pinch in their daily routines.
For 72-year-old Marcia Freeman, who is retired and lives off of a pension, there is no escape from rising expenses.
“Everything goes up, including cheaper items like store brands,” said Freeman, who visited a food bank near Atlanta this week to try and gain control of her grocery costs.
As consumers’ confidence in the economy declines, so have President Biden’s approval ratings, posing a major political threat to Democrats in the November congressional elections. Forty percent of adults said in a June AP-NORC poll that they thought tackling inflation should be a top government priority this year, up from just 14 percent who said so in December.
U.S. inflation erupted amid a swift rebound from the 2020 pandemic recession. Consumers unleashed a wave of pent-up spending, spurred by vast federal aid, ultra-low borrowing costs and savings they had built up while hunkering down. As Americans channeled their purchases toward items for the home, like furniture, appliances and exercise equipment, supply chains became snarled and prices for goods soared. Russia’s war against Ukraine further magnified energy and food prices.
In recent months, as COVID fears have receded, consumer spending has gradually shifted away from goods and toward services, resulting in higher prices for vacations, restaurant meals and entertainment.
The year-over-year leap in consumer prices last month followed an 8.6 percent annual jump in May. From May to June, prices rose 1.3 percent – the largest monthly increase since 2005 – after prices had surged 1 percent from April to May.
Still, some economists have held out hope that inflation might be reaching a short-term peak. Gas prices, for example, have fallen from the eye-watering $5 a gallon reached in mid-June to an average of $4.63 nationwide Wednesday – still far higher than a year ago but a drop that could help slow inflation for July and possibly August.
In addition, shipping costs and commodity prices have begun to fall, and pay increases have slowed. Surveys show that Americans’ expectations for inflation over the long run have eased – a trend that often points to more moderate price increases over time.
“While today’s headline inflation reading is unacceptably high, it is also out-of-date,” Biden said Wednesday. “All major economies are battling this COVID-related challenge.”
The latest disappointing data on inflation came out at the outset of Biden’s trip to the Middle East, where he will meet with officials from Saudi Arabia to discuss oil prices, among other subjects.
Republican members of Congress have blamed the higher prices on Biden’s economic policies, specifically his $1.9 trillion financial support package approved in March.
There have been signs that inflation was slowing before – last summer, and in April of this year – only for it to surge again in subsequent months.
“There may be some relief in the July numbers – commodity prices have come off the boil, at least – but we are a very, very long way from inflation normalizing, and there is no tangible sign of downward momentum,” said Eric Winograd, an economist at asset manager AB.
For now, the relentless pace of price increases has frustrated many Americans, some of whom are placing blame on companies for using inflation as a cover to raise prices beyond the amount they need to cover their own higher costs.
“I feel the inflation pain every day,” Susana Hazard said this week outside a grocery store in New York City. “Every day, everything is going up and up, more than inflation – they’re price-adjusting. Because even if inflation doesn’t happen, they’ve raised the prices.”
Most economists say corporate price gouging is, at most, one of many causes of runaway inflation and not the primary one.
The breadth of the price gains shows how rising costs have seeped into nearly every corner of the economy. Grocery prices have jumped 12.2 percent compared with a year ago, the steepest such climb since 1979. Rents have risen 5.8 percent, the most since 1986. New car prices have increased 11.4 percent from a year earlier. And average airline fares, one of the few items to post a price decline in June, are nevertheless up 34 percent from a year earlier.
The biggest shock has been energy prices, which soared 7.5 percent just from May to June. Gas prices have skyrocketed nearly 60 percent compared with a year ago.
Excluding the volatile food and energy categories, so-called core prices rose 0.7 percent from May to June, the biggest such spike in a year. Core prices jumped 5.9 percent from a year ago.
Inflation is surging well beyond the United States, with 71 million people pushed into poverty in the three months after Russia invaded Ukraine, the U.N. Development Program said last week.
The war’s economic damage has been especially severe in Europe, with its reliance on Russian oil and natural gas squeezing businesses and consumers with sharply higher bills for utilities, groceries, gasoline and more. Inflation reached decades-high levels of 8.6 percent last month in the 19 countries that use the euro currency and 9.1 percent in the United Kingdom in May.
With many people priced out of the market for houses and looking instead to rent, demand for apartments has sent rental rates beyond affordable levels. The average cost of new leases has jumped 14 percent in the past year, according to real estate brokerage Redfin, to an average of $2,016 a month.
Economists expect the rising expense of new leases to send the government’s inflation measure higher in coming months.
The persistence of high inflation has unnerved Chair Jerome Powell and other Fed officials, who are engaged in the fastest series of rate hikes since the late 1980s to try to slow the price spikes. The central bank is expected to raise its key short-term rate later this month by a hefty three-quarters of a point, as it did last month, with potentially more large rate hikes to follow.
Powell has stressed that the central bank wants to see “compelling evidence” that inflation is slowing before it would dial back its rate hikes. Such evidence would need to be a “series of declining monthly inflation readings,” Powell said at a news conference last month.
Many economists worry that the Fed’s drive to quell inflation will cause it to tighten credit too aggressively even while the economy, by some measures, is slowing. Much higher borrowing costs could trigger a recession, potentially by next year.
Consumers have started to pull back on spending, home sales are falling as mortgage rates rise and factory output slipped in May. Yet steadily robust job growth points to an economy that is still expanding.
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