Prices in the US soared again last month, with inflation at a 40-year high

US prices rose faster than economists expected in June — but more recent data shows that there’s hope for inflation easing in the third quarter.  The latest release of consumer price index data, published on Wednesday (July 13), showed that prices had spiked by 9.1% year-on-year, the largest such increase since 1981.

The surge was 0.3 percentage points higher than expectations. From May to June, prices went up by 1.3%. The increase was led by gas and food prices, rising 11.2% and 1% respectively on a monthly basis. Core inflation — which excludes volatile categories like food and energy — rose by 0.7%.

These numbers will keep the US Federal Reserve on its path of aggressive rate hikes. In its June meeting, the Fed raised rates by a dramatic 75 basis points, and indicated in its meeting minutes that it would be open to a similar  hike in September.

A global energy shortage is pushing up prices

For the first half of 2022, energy, shelter, and food have driven up inflation. The worst of the energy crisis is still ahead of us, Fatih Birol, the head of the International Energy Agency, said this week. The energy shortages caused by Russia’s war on Ukraine continue to hike the costs of gas and electricity.

In categories like shelter, inflation could persist. Prices for shelter rose 0.6% from May to June, even as mortgage rates shot up in response to the Fed ending its purchases of mortgage-backed securities and raising the federal funds rate. Housing prices have been slow to move down, but new home constructions are being canceled and sale closings are dwindling.

This has repercussions for tenants as well. The more first-time homebuyers are crowded out of buying a home, the less housing inventory there is for renters. Apartment vacancies in the second quarter dipped, pushing rents to their highest in more than 20 years, according to Moody’s Analytics.

Interest rates cannot directly fix supply issues

During a supply-side crisis, when a shortage of goods and fuel is driving inflation, policymakers could help food and energy producers invest in expanding productive capacity. But the White House and Congress, having decided to let the Fed go it alone on inflation, are comfortable with letting higher unemployment lead to less spending, reducing demand for services and goods.

As a consequence, the labor force participation rate for prime age workers declined from 82.6% to 82.3%. Adding to this decrease in labor supply, absences caused by workers being out sick were up in June for the fourth month in a row.

When will prices fall?

Data from the housing sector has begun to indicate a slowdown in prices coming this quarter. The increases in new home prices are slowing or stopping, and home sale prices may soon drop, based on a June survey from John Burns Real Estate Consulting, a research firm.

“Believe we’re on the edge of cost reductions,” one Grand Rapids builder told John Burns. “Making every effort to refuse further cost increases and pushing for decreases in all areas that have seen significant two year run up.” And while home inventories are still at record lows, they’re starting to rise rapidly, according to data from Altos Research.

The strength of the US dollar compared to other currencies could cause further deflation in US goods. In July, the dollar gained parity with the euro for the first time in 20 years. As of July 12, gas prices had fallen to $4.65 a gallon after averaging $5.01 in June. Oil prices plummeted below $97 a barrel in July on recession fears.

Most importantly, supply chain issues are easing. An Oxford Economics supply chain tracker for June showed less stress on inventories and a better balance between supply and demand.

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