Inflation hits another 40-year high. What does that mean for shoppers and the next Fed rate hike?

Inflation jumped again in June on a persistent climb in gas, food and rent costs, notching another 40-year high and likely solidifying the Federal Reserve’s plans for another big rate hike this month. Prices increased 9.1% from a year earlier, up from an annual rate of 8.6% the prior month and the largest gain since November 1981.

Economists surveyed by Bloomberg had estimated inflation would rise to 8.8%. On a monthly basis, consumer prices increased 1.3%, the largest such leap since 2005, compared with a 1% rise in May. "Ouch," Ian Shepherdson, chief economist of Pantheon Macroeconomics, wrote in a research note of the latest surge in prices. "But this will be the last big increase."

The report bolsters the Federal Reserve's plans in two weeks to raise its key interest rate by a hefty three-quarters of a percentage point for a second straight month as part of an aggressive campaign to curtail inflation.

Stock market reaction

June’s surge again was led by gasoline prices, which increased 11.2% from the prior month and 59.9% annually. The good news is unleaded regular averaged $4.65 Tuesday, down from $5 a month ago. Grocery prices rose by 1% from May and 12.2% over the past 12 months. Both gas and food costs have been elevated largely because Russia’s war in Ukraine. In June, cereal prices rose 2.5% from the prior month and 14.2% from a year ago. Bread was up 1.6% monthly and 10.8% annually. Chicken costs increased by 1.5% from May and 17.3% yearly.

What is causing inflation?

Commodity prices have tumbled recently amid recession fears and ebbing consumer demand. That already has pushed down gas prices and set the stage for more moderate food price increases within months, says Wells Fargo economist Sam Bullard. Core prices, which exclude volatile food and energy items, increased 0.7% in June following a 0.6% rise the prior month, That nudged down the annual rise to 5.9% from 6% in May, the third straight monthly decline.Russia is the leading exporter of fertilizer and the Ukraine war has driven up the cost of that commodity as well as its chief ingredient, natural gas.

Will food prices go down?

Rent climbed 0.8% monthly and 5.8% over the past year as people who hunkered down with family members during the pandemic moved into their own apartments. 

What is rent inflation?

The inflation figure does raise the risk of recession to some extent. Higher inflation leads consumers to rein in spending, which makes up about 70% of economic activity, and could mean bigger Fed rate hikes, which would hurt borrowing. Bank of America says the report is consistent with its call for a recession in the second half of the year.

Does the report raise  recession risks?

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