The rate of inflation in America has risen at its highest rate in thirty years.
Compared to the same period last year, consumer prices soared by 6.2%.
This is the most significant one-year jump seen in the government’s consumer price index since 1990.
The Consumer Price Index rose 1.3% in June alone, bringing the last year’s price gains to a sizzling 9.1%.
That’s the fastest annual pace since November 1981.
Energy prices were responsible for more than half of the monthly gains in headline inflation, with fuel prices rising over 11% last month.
But that’s no surprise, considering prices at the pump reached historic levels.
As inflation strengthens its hold on the economy, the Federal Reserve has started to backtrack on earlier promises that it will be a brief post-pandemic blip.
Inflation will likely get worse before it gets better and could last well into next year.
Price increases show no signs of slowing, adding urgency to the Federal Reserve’s aggressive campaign to cool inflation by raising interest rates.
But that heightens the odds the central bank steers the economy into recession.
Beyond The 9.1%
The headline inflation figure is 9.1%, but increases in the cost of many essential goods are well above that.
The overall category “food at home” is up 12.2% compared to June last year.
Milk is up by 17.1%, baby food by 14%, chicken by 8.6%, and breakfast cereal by 14.2%.
Airfare is up by a whopping 34.1%.
“Virtually every sector has higher-than-normal inflation,” said the head of global economic research at Bank of America, Ethan Harris.
“It’s made its way into every nook and cranny of the economy. That’s the thing that makes it concerning, because it means it’s likely to persist.”
Gas prices rose 4% in May and nearly doubled in one year.
The national average price at the pump hovers at $4.99, inching closer to the inflation-adjusted record of $5.40.
Grocery costs have surged nearly 12% last month compared to the previous year, the biggest increase since 1979.
Restaurant prices jumped 7.4% in the last 12 months, the most significant gain since 1981.
Housing costs are also still climbing.
The shelter index, which includes rents, hotel rates, and what it costs to own a home, increased 5.5% in the past year.
That’s the biggest jump since 1991.
But some costs have gone.
For example, buying a new TV is down 12.7%.
A new smartphone is 20% cheaper than the year before.
Those drops are likely because buying non-essential items has to be put off while consumers rebalance their spending amid a higher cost of living.
Could Inflation Spark A Recession?
With gas prices at an all-time high and with all the other price hikes, are we on the verge of a recession?
The Federal Reserve needs to increase interest rates to bring down inflation without triggering a U.S. recession, which is a tricky task.
Borrowing costs are increased for companies and consumers when interest rates are increased.
That typically hampers economic activity.
Up until now, the U.S. labor market has been solid.
However, the S&P 500’s 20% year-to-date decline reflects concerns on Wall Street that the economy may not take spiking interest rates in stride.
Many experts aren’t anticipating a U.S. recession in 2022 but are recommending that investors position their portfolios defensively for the time being.
Rising interest rates can affect growth stocks.
Discounted cash flow models are frequently used by fund managers to establish their price objectives for growth businesses.
Higher discounted rates are viewed as being less beneficial for future cash flows.
The Russell 1000 Growth Index has decreased by 27.3 percent so far in 2022, while the Russell 1000 Value Index has down by 13.6 percent.
Not all stock market sectors will suffer from inflation.
Rising prices for commodities like oil, natural gas, and other raw materials have enabled the energy sector companies to post historic profits in 2022.
Despite general market weakness, the Energy Select Sector SPDR Fund (XLE) has increased by 21.5 percent this year.
According to John Lynch, chief investment officer at Comerica Bank Wealth Management, rising inflation rates are compelling investors to reconsider accommodative monetary policies in favor of more fundamental value indicators.
How Does The Rise In Inflation Affect Regular Consumers?
Consumers ought to be able to continue making the same amounts of purchases of products and services as before if their salaries rise along with price increases.
But unfortunately, this won’t be true for all consumers, so some will struggle to purchase what they used to.
Your dollar doesn’t go as far, so it’ll be harder to buy everything on your list with the same amount of money.
The impact of inflation on consumers is that as prices rise, people have to pay more for the things they want, limiting their purchasing power.
Everyone will have to pay more; therefore, they might start requesting pay raises.
If wages start to go up, the whole process can get additional amplification, and things can get tough to control.
Then it becomes tough to bring things back.
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References:
https://abcnews.go.com/Business/americans-inflation-hits-30-year-high/story?id=81110162
https://www.axios.com/2022/07/13/inflation-cpi-biden-prices
https://www.forbes.com/advisor/investing/why-is-inflation-rising-right-now/
https://apnews.com/article/key-inflation-report-highest-level-in-four-decades-c0248c5b5705cd1523d3dab3771983b4
https://www.newsweek.com/joe-biden-inflation-problem-just-got-lot-worse-1723882
