Finance & economics
American inflation: On the up and up
Inflation in America tops forecasts yet again, adding to recession risks
At this point upside surprises in inflation occur with such frequency that surprise is probably the wrong word for them.
So it was with America’s consumer price index (CPI) for June, published on July 13th.
It soared 9.1% compared with a year earlier, marking yet another four-decade high and beating forecasts for an 8.8% increase.
Still, investors seemed to be caught unawares, with stocks falling sharply after the data, adding to this year’s big losses.
The pessimism in financial markets is easily understood: persistently high inflation is forcing the Federal Reserve to press on with aggressive monetary tightening, even at the potential cost of a recession.
All the more important, therefore, to understand how persistent inflation will be.
In this respect the most concerning part of the latest data was not the shocking headline figure, about half of which could be attributed to oil and gas prices, which surged early in June but have since ebbed.
Rather, it was the change in core prices, stripping out volatile food and energy.
Core inflation rose 0.7% in June from May, the highest month-on-month increase in a year.
And it was not a blip: over the past three months core inflation has been running at an annualised rate of nearly 8%, an indication of the breadth of price pressures.
Just about everything—from cars to clothing and furniture to rents—is getting more expensive.
That reinforces investors’ belief that the Fed will stay on its hawkish path.
A day before the inflation data, bond-market pricing implied that the Fed would raise interest rates by three-quarters of a percentage point at its next rate-setting meeting in late July, the second straight increase of that size.
Following the data, bond pricing put the chances at roughly 50-50 that it would instead opt for a full percentage point increase.
Either way, it puts the Fed on track for the steepest monetary tightening in a calendar year since 1981, when Paul Volcker was at the central bank’s helm.
That is already weighing on economic growth.