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

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U.S. consumer prices rose more than expected in June, hitting an annual pace of 9.1%, a new 40-year high that cements expectations of another historic interest rate hike from the Federal Reserve by 0.75 percentage points this month.

The consumer price index released Wednesday by the Bureau of Labor Statistics accelerated further last month, beating economists’ estimates for an 8.8% increase. This is the largest year-over-year increase since November 1981.

Prices jumped another 1.3% month-on-month in June, after rising 1% in May.

After volatile items such as food and energy are eliminated, “core” inflation rose 0.7%, compared to the 0.6% advance in May. This translated into an annual increase of 5.9%, roughly matching the 6% pace recorded the previous month.

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The data will boost the U.S. central bank’s efforts to restore price stability, which intensified significantly last month after officials scrapped previously laid plans to hike rates by half a point and instead implemented the first 0.75 percentage point increase since 1994.

Policymakers have also signaled their intention to raise rates to a level – estimated at around 3.5% – that begins to dampen economic activity by the end of the year. They are looking to maintain an aggressive monetary policy tightening approach until there is evidence that monthly inflation readings are slowing to a pace more in line with the Fed’s 2% target.

Treasury yields jumped on the back of the inflation report, with the yield on the two-year note, which moves along with interest rate expectations, hitting its highest level since late June. It stabilized at 3.2%.

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

Monthly inflation gains were “wide,” according to the BLS, but a 7.5% rise in the energy index contributed nearly half of the jump in headline inflation. Gasoline prices alone rose 11.2% in June, while food prices rose 1%. Prices for new and used vehicles continued to climb, increasing by 0.7% and 1.6% respectively.

Worryingly, inflation in services, excluding energy, rose by 0.7% on a monthly basis and by 5.5% compared to the same period last year. Housing costs were responsible for a large share of the increase, rising 0.6% for the month or 5.6% year over year. This is the largest annual increase since February 1991. Prices for transport services and medical care also increased.

An outlier was airfares, which fell 1.6% after two months of double-digit growth.

The Biden administration, whose popularity has plummeted amid soaring inflation, this week sought to outpace June’s high figure and played down the acceleration, pointing out that the data covered a period before a sharp drop in energy and other commodity prices. .

Brent crude, the international oil benchmark which had soared to nearly $140 a barrel in early March following Russia’s invasion of Ukraine, has fallen below $100 a barrel this month. Global food prices have also moderated from historic highs.

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On Tuesday afternoon, a fake version of the June report circulated online saying prices rose at an annual rate of 10.2%, forcing the Bureau of Labor Statistics to publicly discredit it.

If the Fed were to raise rates an additional three-quarters of a percentage point at its July meeting, as expected, the target range for the fed funds rate would rise to 2.25% to 2.50%.

Along with these actions, which include reducing its balance sheet by $9 billion, the Fed has intensified its rhetoric not only about its “unconditional” commitment to reducing inflation, but also about what it is willing to risk in terms of economic recovery to do so.

While demand for labor has remained extremely strong, with 372,000 additional jobs created in the last month alone, economists fear the momentum will soon wane as the US economy rushes into a recession at some time next year.

The Fed has already started to recognize that unemployment will have to rise, with officials recently projecting unemployment to rise from the current all-time low of 3.6% to just over 4% by the end of 2024.

Many economists believe that a more accurate estimate is around 5%, which translates to much larger job losses.

Additional reporting by Kate Duguid in New York

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