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Washington, June 10 (BNA): Prices of gas, food and most other goods and services jumped in May, pushing inflation to its highest level in four decades and giving American households any respite from rising costs.
The Labor Department said Friday that consumer prices rose 8.6% last month from a year earlier, faster than the 8.3% annual increase in April. The Associated Press (AP) reported that the new inflation number, the highest since 1981, will increase pressure on the Federal Reserve to continue raising interest rates aggressively.
On a monthly basis, prices jumped 1% from April to May, much faster than the 0.3% increase from March to April. Much higher prices for everything from airline tickets to restaurant meals to new and used cars contributed to this increase. These price hikes have also led to a rise in so-called “core” inflation, a measure that excludes volatile food and energy prices. In May, core prices jumped 0.6% for the second month in a row. They are now 6% higher than they were a year ago.
Friday’s report highlighted concerns that inflation is extending beyond energy and higher-priced commodities. And the increased pressure on the Federal Reserve to raise interest rates faster – which means high-cost loans to consumers and businesses – will increase the risks of a recession.
Virtually every sector has higher-than-normal inflation,” said Ethan Harris, head of global economic research at Bank of America. “It has made its way into every nook and cranny in the economy. That is the thing that makes it worrying, because it means it is likely to continue.”
Gas prices only rose 4% in May and are up nearly 50% in one year. The national average price at the pump was $4.99 on Friday, according to AAA, close to a record inflation rate of $5.40.
The cost of groceries rose 12% last month compared to the previous year, the largest increase since 1979. The rise in grain and fertilizer prices after Russia’s war against Ukraine has exacerbated that rise. Restaurant prices jumped 7.4% last year, the largest increase in 12 months since 1981, reflecting rising food and staff costs.
Across the economy, employers face enormous pressure to raise wages in a labor market that remains strong, with low unemployment, few layoffs, and near-record job openings. But while average wages are rising at their fastest pace in decades, they are not increasing fast enough for most workers to keep up with inflation. Many families collected savings from the government’s stimulus aid during the pandemic and are now relying on those savings to pay the bills.
Housing costs are still on the rise. The government shelter index, which includes rents, hotel rates and a measure of the cost of owning a home, rose 5.5% last year, the most since 1991. Airline prices are up nearly 38% in the past year, the most since 1980. .
Rampant inflation is putting severe pressure on families. Low-income Americans and Hispanic Americans in particular suffer because, on average, a greater proportion of their income is consumed by necessities.
In light of Friday’s inflation reading, the Fed is almost certain to implement the fastest series of interest rate increases in three decades. By sharply increasing borrowing costs, the Fed hopes to cool spending and growth enough to curb inflation without pushing the economy into recession. It will be difficult to strike a balance.
The Fed has indicated that it will raise its key short-term rate by half a point – twice the size of the usual hike – next week and again in July. Some investors were hoping the Fed would then slow rate increases to a quarter point when it meets in September or perhaps halt credit tightening temporarily. But with inflation raging, investors are now expecting another half-point increase in September, which would be the fourth since April.
Polls show that Americans see high inflation as the country’s biggest problem, and most disapprove of President Joe Biden’s handling of the economy. Republicans in Congress are criticizing Democrats on this issue in the run-up to this fall’s midterm elections.
Biden plans to tackle inflation later Friday in a speech at the Port of Los Angeles, which transports a record amount of goods under an agreement sponsored by the White House. However, even as the number of ships waiting to unload in port decreased sharply, inflation did not occur.
High prices forced Rocky Harper of Tucson, Arizona, to start doing gig work for delivery companies, in addition to his regular full-time job with a parcel delivery service. He said his main job pays $800 a week, an amount that “was really good money and is now a little higher than the poor.”
Harper, 43, said he and his fiancée are postponing the marriage because they can’t afford it now. They have cut Netflix and Hulu. His car’s catalytic converter was recently stolen – an increasingly common theft – due to the rare metals it contained and their prices had skyrocketed. The repair will cost $1300.
He said: “With food, gas and rent – a sacred cow.” “I’m working a tremendous amount of overtime, just to make it, just to keep it together.”
A report released by the World Bank this week made it clear that high inflation is a global problem that threatens to slow economies around the world. For the 19 countries that use the euro currency, inflation fueled by soaring food and fuel prices hit a record 8.1% last month, prompting the European Central Bank to announce its first rate hike in 11 years, starting in July. And again in September.
In the coming months, prices in the US may fall somewhat. Many big retailers, including Target, Walmart, and Macy’s, are now stuck with lots of patio furniture, electronics, and other goods that are suddenly no longer in demand. This week, Target said it’s slashing prices due to piles of unsold inventory.
Although Americans spoiled the economy, they largely continued to spend. The Fed reported that they are increasingly turning to credit cards, as total card debt rose sharply in April, although this debt barely exceeded pre-pandemic levels.
How long will these trends — higher wages, additional savings, and increased credit card debt — enable Americans to keep spending on determining whether a recession can be avoided. To cool down inflation, spending growth must be slowed.
For lower-income Americans, there are indications that that is already slowing. Sales are weakening at retailers that cater to budget-conscious shoppers, such as dollar stores. Walmart said customers are trading in cheaper goods.
Research by the Bank of America Institute, which uses anonymous data from millions of its customers’ credit and debit card accounts, shows that gasoline takes up a larger share of budgets.
For low-income households — defined as those with less than $50,000 in income — gas spending accounted for nearly 10% of total spending on credit and debit cards in the last week of May, the institute said this week. That’s up from about 7.5% in February, a sharp increase in such a short period.
Many small businesses are still struggling to keep up with rising supplies and labor costs, a sign of persistently high prices. Andrew McDowell, founder of The Love Market and Cafe in Los Angeles, said he pays more for food supplies, workers and even for reusable bags, which used to cost him 23 cents but now cost 45 cents.
Company BLT chicken now costs 20% more than it did before the pandemic. McDowell said he is grappling with the highest prices for supplies and workers he’s ever faced. He plans to review all his costs and menu prices and thinks he may have to raise prices again, by 10% to 20%.
“Every product is affected, every aspect of the business is affected,” McDowell said.
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