Inflation has hit a shocking 9.1%, a 40-year high, according to the Consumer Price Index (CPI) for June, the most recent data available. Economists had expected this number to reach 8.8%, and even that number was nervewracking for the markets.
The CPI is a weighted average of prices of consumer goods and services purchased by households and excludes investment items like real estate sales, stocks, bonds, and life insurance, as well as sales taxes, but does include rent prices.
Measured by the U.S. Bureau of Labor Statistics (BLS), the CPI was downlplayed on Tuesday by the White House, whose officials called the index “outdated” on a call to reporters, pointing to softening of gas prices, wholesale used car prices, and global shipping costs.
Inflation hit an annual rate of 8.6% in May, which is why the Federal Reserve (the Fed) stepped up interest rate increases, so we’ll be watching for even more rate increases to follow. Of note, wages are rising but still aren’t keeping up as annual raises are immediately gobbled up by inflation rates.
Why does the Fed raise rates in a time of massive inflation such as this? Doesn’t that punish already struggling households?
In times like this with demand growing 10% during a pandemic, and only 4% in years leading up to COVID, supply simply can’t keep up (with or without a supply chain crisis). The traditional option is for demand destruction, and the vehicle for that is the Fed’s rate increases.
The traditional option is for demand destruction, and the vehicle for that is the Fed’s rate increases.
An example of demand destruction is the massive spikes in rent amounts (which is measured in the CPI), giving people sticker shock, even in situations where they have no choice.
The struggle is that the Consumer Price Index measures goods that none of us can avoid buying, particularly food and gas, strongly impacting the most economically vulernable in America.
The debate is raging regarding whether or not we are in a recession, what the method is for recovery, and what policies need to be implemented to end the rising inflation rates. The contentious question today is – have we peaked? It doesn’t appear that a consensus is on the horizon.
