By Emma Nitzsche
The cost of living reached dangerous highs in June, raising questions about whether the spike in prices will subside in line with the Federal Reserve’s predictions. According to a Federal Reserve Bank of New York survey published Monday, inflation peaked at the highest level since June 2013.
A report from the Labor Department showed the consumer price index climbing 0.9% from last month. The increase easily exceeded prior forecasts, with the consumer price index (CPI) increasing 5.4% from a year ago. The numbers represent the highest 12-month rate since August 2008, when oil hit a record $150 a barrel.
Services hit hard by the Covid-19 pandemic, such as air travel, hotels, rental cars, entertainment, and recreation, have been forced to raise prices to recover for the past year. Companies can’t get enough supplies or labor to keep up with increasing sales, forcing them to pay higher prices for almost everything and passing those costs to consumers. According to a National Federation of Independent Business survey, 47% of small businesses indicated that they raised the average selling prices in May, the highest share since 1981.
In May, the government reported that consumer prices for goods and services rose 5% from a year prior, the fastest year-over-year jump since 2008. The CPI, excluding food and energy categories, rose 4.5% from the year before. Compared with two years ago, overall prices rose 3% in June.
The Federal Reserve still expects inflation rates to fall in the future. Fed Chairman Jerome Powell said inflation could turn out to be “higher and more persistent than we expect” but has maintained that it’s likely temporary. Powell disregarded the rising prices for goods and services, noting that widespread bottlenecks have disrupted the supply chain and caused a wave of high demand from consumers who have money after being pent-up for a year.
Yet the Federal Reserve admits it was caught off by how high inflation has risen. According to the minutes of the Fed’s most recent strategy session, there is a risk that inflation could stay elevated for longer than expected. Despite this, the Fed did not indicate that they were considering dialing back their aggressive bond-buying programs. In mid-June, policymakers noted that they were not ready to start pulling back on their asset purchases. In a report released Friday, the Fed reiterated its original view that the inflation numbers rose because of “bottlenecks, hiring difficulties, and other largely transitory factors related to the economy’s rebound from the pandemic.”
However, a sustained increase in inflation could encourage the Fed to react more aggressively later to achieve the projected 2% inflation rate over the next two years. Although consumers see notable increases in the price of food and gas, the costs are likely to subside soon—supporting the Fed’s argument that the inflation surge is temporary.
Nationwide senior economist Ben Ayers told MarketWatch that “the spike in inflation still looks to be primarily Covid-related and temporary as outliers continue to drive much of the upward push in prices.” Despite this, Ayers notes that “the effects of the recent jump could linger for consumers for some time with above-average costs extending in 2022.”
