Key Advisors Group LLC co-owner Eddie Ghabour discusses the current state of the market and the Federal Reserve on “Varney & Co.”
Inflation remained painfully high in May, with consumer prices hitting a new four-decade high that exacerbated financial strain for millions of Americans and worsened a political crisis for President Biden.
The Department of Labor said Friday that the Consumer Price Index, a large measure of the price of everyday goods, including gasoline, groceries and rents, rose 8.6% in May compared to a year ago. Prices jumped 1% in the one-month period since April. These figures were both higher than the main figure of 8.3% and the 0.7% monthly gain projected by Refinitiv economists.
INFLATION TIMELINE: MAP OF BIDEN ADMIN’S RESPONSE TO RAPID PRICE GROWTH
Mark the faster pace of inflation since December 1981.
So-called core prices, which exclude more volatile measurements of food and energy, rose 6% from the previous year, even more than Refinitiv expected. Core prices also rose 0.6% on a monthly basis, suggesting that underlying inflationary pressures remain strong.
“What a bad press CPI. Not only was it higher than expected on almost every front, but the pressures were clearly evident in the stickier parts of the market,” said Seema Shah, chief strategist at Principal Global Investors. “The decline in inflation, whenever that happens, will be painfully slow.”
Price hikes were widespread: Energy prices rose 3.9% in May from the previous month and increased 34.6% from last year. Gasoline, on average, costs 48.7% more than a year ago and 7.8% more than in April. Overall, fuel prices rose 16.9% in May on a monthly basis, pushing the one-year increase to a staggering 106.7%.
In another worrying sign, housing costs – which account for around a third of CPI – accelerated in May, climbing 0.6%. It marked the fastest one-month earning since 2004. Year-on-year, shelter costs increased 5.5%, the fastest since February 1991.
Food prices also increased 10.1% over the year and 1.2% over the month, with the largest increases in dairy and related products (+ 2.9%, the largest monthly increase since July 2007), soft drinks (1.7%). cereals and bakery products (1.5%) and meat, poultry, fish and eggs increased (1.1%).
Shoppers wait in line at a Costco wholesale store in Orlando. (Paul Hennessy / SOPA Images / LightRocket via / Getty Images)
The scorching inflation has created severe financial pressures for most US households, who are forced to pay for more basic necessities like food, gasoline and rent. The burden is being borne disproportionately by low-income Americans, whose already stretched paychecks are heavily impacted by price fluctuations.
Rising prices are consuming the hefty wage gains American workers have seen in recent months: Real average hourly wages fell 0.6% in May from the previous month, as rising inflation eroded the Total wage increase of 0.3%, according to the Department of Labor. Year-on-year, real earnings fell 3% in May.
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Rampant inflation has become a major political responsibility for Biden ahead of November’s mid-term elections, in which Democrats are expected to lose their already slim majority. Polls show that Americans see inflation as the biggest problem facing the country and that many families blame Biden for the spike in prices.
The warmer-than-expected report will also have major implications for the Federal Reserve, likely consolidating a series of aggressive rate hikes as central bank officials try to tame inflation. Policy makers have already raised the benchmark interest rate by 50 basis points – double the usual size – in May and are expected to approve at least two more similarly sized hikes in June and July.
President Joe Biden speaks during a visit to a family farm in Kankakee, Illinois on May 11, 2022. (Taylor Glascock / Bloomberg via Getty Images / Getty Images)
Nearly 98% of investors now expect the Fed to make another half-point rate hike in September as inflation remains stubbornly high, according to the CME FedWatch tool.
However, the Fed finds itself in a precarious situation as it walks the line between cooling consumer demand and moving inflation closer to its 2% target without inadvertently dragging the economy into a recession. Rising rates tend to create higher rates on lending to consumers and businesses, which slows the economy forcing employers to cut back on spending.
“The Fed is now between a rock and a very tough place,” said Peter Earle, a researcher at the American Institute for Economic Research. “Acting more aggressively to stem price increases increases the likelihood of causing a recession.”