The consumer price index (CPI) for June came in at 9.1% Wednesday, substantially higher than analyst expectations of 8.8%, indicating that economic hardship will persist for Americans as energy and food costs continue to rise.
The wider-than-expected margin between June’s 9.1% headline inflation and last month’s 40-year high of 8.6% will likely prompt the Federal Reserve to raise its benchmark rate 75 basis points for a second consecutive time at the July 27 Federal Open Market Committee (FOMC) meeting.
Data shows U.S. consumer prices in June accelerated at the fastest annual pace since November 1981; it is the third consecutive month in which CPI increased 1% or more compared to the previous month. In addition, Core CPI, which excludes the food and energy components, rose 5.9% in June, compared to 6.0% in May. Economists expected an increase of 5.7%.
Finally, the U.S. Bureau of Labor Statistics reported that the CPI For All Urban Consumers (CPI-U) increased 1.3% in June on a seasonally adjusted basis after rising 1.0% in May.
Michael Pearce, a senior U.S. economist at Capital Economics, said Wednesday’s report confirms the Fed’s need to hike interest rates by 75 basis points.
“While some will draw parallels with the shockingly bad May CPI report, the backdrop is markedly different,” explained Pearce. “Commodity prices have fallen sharply, and we’ve seen clearer signs of an economic slowdown, both of which will contribute to weaker price pressures ahead.”
However, Canada’s aggressive 100-basis-point rate hike Wednesday might encourage the U.S. to follow suit if it hopes to stay one step ahead of the curve in a bid to get inflation under control.
“This report will make for very uncomfortable reading at the Fed,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
The White House warned June’s CPI figures would be “highly elevated,” citing substantial increases in the cost of gasoline and food, but said the reading was “already out of date” because of “falling energy prices.”
Brian Deese, director of the National Economic Council, agreed with the White House’s defense of June’s CPI data and underscores falling gasoline prices, as reported by Yahoo Finance on Wednesday. Deese did not specify how price volatility in energy markets would appear in future reports.
“The Administration tried to get out in front of the bad economic news and tell us the inflation report was going to be ugly this month,” said Christopher Rupkey, chief economist at fwd: bonds. “But it was even worse than markets imagined in their wildest dreams.”
Following the inflation report, stocks experienced a sharp drop while both the U.S. Dollar and Treasury Yields jumped higher.